IDEAS home Printed from https://ideas.repec.org/p/oxf/wpaper/2000-fe-06.html
   My bibliography  Save this paper

Active agents, passive principals; the role of the chief executive in corporate strategy formulation and implementation

Author

Listed:
  • James Dow
  • Clara Raposo

Abstract

In this paper we use agency theory to study the active role of the chief executive in the formulation of corporate strategy. Unlike traditional applications of agency theory, we allow the agent (CEO) to play a role in defining the parameters of the agency problem. We argue that CEOs will have an incentive to propose difficult, ambitious strategies for their corporations. The effect arises because in equilibrium, the agent may be overcompensated in the sense that the participation constraint is not binding in determining his compensation. The agent can exploit this by proposing ambitious corporate strategies, thereby influencing the parameters of the constraints in the agency problem. The principal (the owners of the company) can mitigate this by precommitting to pay high compensation regardless of the manager`s chosen strategy, but may optimally prefer not to do so.

Suggested Citation

  • James Dow & Clara Raposo, 2000. "Active agents, passive principals; the role of the chief executive in corporate strategy formulation and implementation," Economics Series Working Papers 2000-FE-06, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:2000-fe-06
    as

    Download full text from publisher

    File URL: https://ora.ox.ac.uk/objects/uuid:9b7002c3-9dae-4faf-85f7-8b1806dc18f9
    Download Restriction: no
    ---><---

    Other versions of this item:

    More about this item

    Keywords

    agency theory; executive compensation; free-cash-flow theory; strategic complexity;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oxf:wpaper:2000-fe-06. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Anne Pouliquen (email available below). General contact details of provider: https://edirc.repec.org/data/sfeixuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.