Firm Value and Managerial Incentives: A Stochastic Frontier Approach

We provide a direct estimate of the magnitude of agency costs in publicly-held corporations. We compute an explicit performance benchmark that compares a firm's actual Tobin's Q to the Q* of a hypothetical value-maximizing firm having the same inputs and characteristics as the original firm. The Q of the average sample firm is around 16% below its Q*, equivalent to a $1,432 million reduction in its potential market value. We relate the shortfall...