TY  - JOUR
AU  - Bebchuk,Lucian Arye
AU  - Jolls,Christine
TI  - Managerial Value Diversion and Shareholder Wealth
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6919
PY  - 2000
Y2  - April 2000
UR  - http://www.nber.org/papers/w6919
L1  - http://www.nber.org/papers/w6919.pdf
N1  - Author contact info:
Lucian A. Bebchuk
Harvard Law School
1545 Massachusetts Avenue
Cambridge, MA 02138
Tel: 617/495-3138
Fax: 617/812-0554
E-Mail: bebchuk@law.harvard.edu

Christine Jolls
Yale Law School
P.O. Box 208215
New Haven, CT 06520
Tel: 203/432-1958
Fax: 203/432-4570
E-Mail: christine.jolls@yale.edu
AB  - The agents to whom shareholders delegate the management of corporate affairs may transfer value from shareholders to themselves through a variety of mechanisms, such as self-dealing, insider trading, and taking of corporate opportunities.  A common view in the law and economics literature is that such value diversion does not ultimately produce a reduction in shareholder wealth, since value diversion simply substitutes for alternative forms of compensation that would otherwise be paid to managers. We question this view within its own analytical framework by studying, in a principal-agent model, the effects of allowing value diversion on managerial compensation and effort.  We suggest that the standard law and economics view of value diversion overlooks a significant cost of such behavior.  Many common modes of compensation can provide managers with incentives to enhance shareholder value; replacing such compensation would reduce these incentives.  As a result, even if the consequences of a rule permitting value diversion can be fully taken into account in settling managerial compensation, such a rule might still produce a reduction in shareholder wealth -- and would not do so only if value diversion would have some countervailing positive effects (a possibility which our model considers) that are sufficiently significant in size.
ER  -