Essay About Corporate Managers And Managers Control

Financial
Financial
Financial Ratio Analasis
Corporate managers are the agents of shareholders, a relationship fraught with
conflicting interests. Agency theory, the analysis of such conflicts, is now a major part of
the economics literature. The payout of cash to shareholders creates major conflicts that
have received little attention.1 Payouts to shareholders reduce the resources under
managers control, thereby reducing managers power, and making it more likely they
will incur the monitoring of the capital markets which occurs when the firm must obtain
new capital (see Easterbrook, 1984, and Rozeff, 1982). Financing projects internally
avoids this monitoring and the possibility the funds will be unavailable or available only
athigh explicitprices.Competition in the product and factor markets tends to drive prices towards
minimum average cost in an activity. Managers must therefore motivate their
organizations to increase efficiency to enhance the problem of survival. However,
product and factor market disciplinary forces are often weaker in new activities and
activities that involve substantial economic rents or quasi rents.
In these cases,
monitoring by the firms internal control system and the market for corporate control are
more important. Activities generating substantial economic rents or quasi rents are the
typesof activitiesthatgeneratesubstantialamountsof free cash flow.The agency costs of debt have been widely discussed, but the benefits of debt in
motivating managers and their organizations to be efficient have been ignored. I call
theseeffectsthe “controlhypothesis”for debtcreation.
Managers with substantial free cash flow can increase dividends or repurchase
stock and thereby pay out current cash that would otherwise be invested in low-return
projects