Testing Agency Theory with Entrepreneur Effort and Wealth

Authors: MARIANNE P. BITLER; TOBIAS J. MOSKOWITZ; ANNETTE VISSING-JØRGENSEN

Source: The Journal of Finance, Volume 60, Number 2, April 2005 , pp. 539-576(38)

Publisher: Blackwell Publishing

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Abstract:

We develop a principal-agent model in an entrepreneurial setting and test the model's predictions using unique data on entrepreneurial effort and wealth in privately held firms. Accounting for unobserved firm heterogeneity using instrumental-variables techniques, we find that entrepreneurial ownership shares increase with outside wealth and decrease with firm risk; effort increases with ownership; and effort increases firm performance. The magnitude of the effects in the cross-section of firms suggests that agency costs may help explain why entrepreneurs concentrate large fractions of their wealth in firm equity.

Document Type: Research article

DOI: 10.1111/j.1540-6261.2005.00739.x

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