Agency Costs, Firm Value, and Corporate Investment Defended on Friday, 14 September 2012

Often firms lack the necessary internal resources to pursue all profitable investment opportunities at their disposal. One of the most important roles of financial markets is to allocate resources from different economic agents to the firms that will better employ them, thereby enabling productive investment to take place. However, there are informational and incentive-related problems in financial markets that result in agency costs. These costs can hinder the efficient allocation of capital across the economy and, as a result, can impact economic growth. This thesis examines the mechanisms that investors and managers use to reduce the agency costs of outside financing and the impact of such costs on firms’ investment decisions and value. The first chapter shows that the voluntary disclosure of information can help overcoming the informational asymmetry between managers and investors. The second chapter provides evidence that institutional ownership of firms can improve firm decisions and increase firm value when coupled with the appropriate incentives. In particular, we show that stock illiquidity is a key incentive in this setting. The last chapter examines the impact of accessing the public debt market on corporate investment. The findings support the hypothesis that firms adjust their investment decisions to offset an increase in agency costs, which in turn enables them to access outside financing on more favorable terms.

Keywords

agency theory, information asymmetry, mergers and acquisitions, monitoring, public debt market, bond market, corporate investment, synergy disclosure, voluntary disclosure