Shareholders and Managers as Principal-Agent Hierarchies and Cooperative Teams

Matthias Kiefer, Edward Jones, Andrew Adams

Research output: Contribution to journalArticle

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Abstract

Purpose: Shareholders and managers can work in a hierarchy in which principals attempt to control the actions of agents to achieve the wealth objective. Alternatively, shareholders and managers can work together as a cooperative team in which shareholders provide financial capital and managers provide human capital. We examine the different implications for value creation provided by the two approaches.
Methodology: By comparing the literature on the effectiveness of control arrangements in principal-agent hierarchies and on shareholders and managers as productive teams, we identify deviations from optimal outcomes and suggest solutions.
Findings: Our analysis indicates that a cooperative framework has some advantages over the hierarchical model. The stability of human capital and the relationship between managers and shareholders can be enhanced when latitude for renegotiation of agreements is built into contracts, and shareholders provide capital in increments which vest over time.
Practical Implications: By surrendering control using stock options programmes,
managers are free to invest in relationship-specific assets. Shareholders can control the provision of capital by withdrawing investment if insufficient returns are realised i.e. if stock options do not meet vesting requirements.
Original languageEnglish
Pages (from-to)48-71
Number of pages24
JournalQualitative Research in Financial Markets
Volume9
Issue number1
DOIs
Publication statusPublished - 6 Feb 2017

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