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Participation Financing as a Solution to the Agency Problem of Perk Consumption in Small Firms

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  • Hua Yu

    (University of Quebec)

Abstract

Although it has been suggested that participation financing may allow publicly traded firms to reduce the agency cost of perk consumption, the effect of this type of financing in small firms needs more discussion. The objective of the article is to analyze the small firm effects on the effectiveness of the participation financing in dealing with the agency problem of perk consumption. The participation option gives outside investors less protection against the excessive entrepreneur perk consumption when the firm’s default risk is high. By contrast, the option is more effective in firms with rapid growth or high levels of information asymmetry and therefore high monitoring costs.

Suggested Citation

  • Hua Yu, 1994. "Participation Financing as a Solution to the Agency Problem of Perk Consumption in Small Firms," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 3(3), pages 215-227, Fall.
    • Handle: RePEc:pep:journl:v:3:y:1994:i:3:p:215-227
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Participation Financing; Agency Problem; Perk; Perquisite; Small Firm; Small Business;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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