Principals, Agents and Incomplete Contracts: Are Surrender of Control and Renegotiation the Solution?

Matthias Kiefer, Edward Jones and Andrew Adams
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Andrew Adams: Heriot-Watt University

No 1603, CFI Discussion Papers from Centre for Finance and Investment, Heriot Watt University

Abstract: Companies can be regarded as nexuses with contractual relationships between management and shareholders (Jensen and Meckling, 1976). The extent to which managerial and shareholder rewards are determined by incompleteness of contracts has been extensively studied (Hart, 1995a). Incomplete contracts affect the stability of the relationship between managers and shareholders as managers can leave or be dismissed (Oyer, 2004; Gillan, Hartzell, and Parrino, 2009). Furthermore, discretion for renegotiation of such contracts can be desirable, if stability is improved (Schwab and Thomas, 2006; Roberts and Sufi, 2009). Discretion for renegotiation of contracts between management and shareholders is increased in public companies when shareholders surrender control over management to boards (Blair and Stout, 1999; Peters and Wagner, 2014). Corporate stability, renegotiation of agreements and control rights over assets are not systematically captured by principal-agent models.

Keywords: Board Insulation; Executive Compensation; Incomplete Contracts; Managerial Labor Market; Market for Corporate Control; Principal-Agent Model. (search for similar items in EconPapers)
JEL-codes: D86 G38 J33 J65 K12 M52 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-cta and nep-hrm
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