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Journal of Economics, Finance and Administrative Science
Print version ISSN 2077-1886
Abstract
OFENBERG, David. Agency Costs and the Size Discount: Evidence from Acquisitions. Journal of Economics, Finance and Administrative Science [online]. 2010, vol.15, n.29, pp.73-94. ISSN 2077-1886.
Many scholars have found a negative relationship between a firms size and its value, as measured by Tobins q. This result is called the size discount. There are hypotheses about why the size discount exists, but none have been rigorously empirically tested. This paper argues that the size discount is created by the inability of shareholders to minimize agency costs in larger companies. Statistical tests suggest that the size discount only appears in large firms with managers that impose excessive agency costs upon their shareholders. Empiricists who use Tobins q to proxy for growth opportunities may need a different proxy.
Keywords : Agency costs; size discount; acquisitions; corporate governance.