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Increasing firm value by mitigating market imperfections

Increasing firm value by mitigating market imperfections

The separation of company ownership and company management is a prime reason for inefficient allocation of capital, Manuel Vasconcelos argues in his PhD dissertation Agency Costs, Firm Value, and Corporate Investment.. Vasconcelos’ research shows that market frictions exist in the form of so-called agency costs and informational asymmetries, but that there are effective mechanisms to reduce their impact. The use of these mechanisms can lead to an increase in firm value and can eventually foster economic growth. Agency costs are associated with the superior information of managers relative to owners, and arise because managers have reduced incentives to act in the owners’ interest. Vasconcelos finds that in these cases the firm’s value is reduced and that the existence of these costs affects firms’ investment decisions. He argues that it is of prime importance to understand how to reduce their impact, through mechanisms such as voluntary disclosure of information or monitoring by institutional shareholders. He argues that these are effective in reducing agency costs, and can therefore enhance the value of the firm.

Manuel Vasconcelos will defend his dissertation on 14 September 2012 at 9.30am at Rotterdam School of Management, Erasmus University (RSM). His promoter is Professor Peter Roosenboom. Other members of the Doctoral Committee are Professor Abe de Jong and Professor Frederik Schlingemann of RSM, and Professor Miguel Ferreira of Nova School of Business, Lisbon.

Manuel Vasconcelos’ PhD research project is conducted within the Erasmus Doctoral Programme in Business & Management, organised by Erasmus Research Institute of Management (ERIM), the joint research institute of Rotterdam School of Management, Erasmus University (RSM) and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.

About Manuel Vasconcelos
Manuel Vasconcelos (1984, Portugal) obtained his Bachelor in Business Administration in 2006 from ISCTE Business School in Lisbon, Portugal. During his undergraduate studies he did exchanges at the Universidad de Granada in Spain and at the Universidade Federal de Santa Catarina in Brazil. Manuel graduated cum laude from the Master in Finance&Investments at RSM in 2008. He then joined the Finance Department of RSM to conduct research in corporate finance. His research interests include mergers and acquisitions, financial accounting, private equity, and corporate investment. He is a co-author of a chapter in the Handbook of Private Equity, published by Oxford University Press. His work has been presented at several international conferences and he spent a semester at Stern School of Business, New York University, as a Visiting Scholar. During his PhD studies, Manuel was a member of the ERIM PhD Council and of the organising committee of the PREBEM conference 2011. He also passed the three levels of the CFA exam. Manuel has been involved in teaching courses on mergers and acquisitions, corporate finance, and entrepreneurial finance at bachelor and master level. He will join Cornerstone Research in New York as an Associate from October 2012.

Thesis abstract
Often firms lack the necessary internal resources to pursue all profitable investment opportunities at their disposal. One of the most important roles of financial markets is to allocate resources from different economic agents to the firms that will better employ them, thereby enabling productive investment to take place. However, there are informational and incentive-related problems in financial markets that result in agency costs. These costs can hinder the efficient allocation of capital across the economy and, as a result, can impact economic growth. This thesis examines the mechanisms that investors and managers use to reduce the agency costs of outside financing and the impact of such costs on firms’ investment decisions and value. The first chapter shows that the voluntary disclosure of information can help overcoming the informational asymmetry between managers and investors. The second chapter provides evidence that institutional ownership of firms can improve firm decisions and increase firm value when coupled with the appropriate incentives. In particular, Vasconcelos shows that stock illiquidity is a key incentive in this setting. The last chapter examines the impact of accessing the public debt market on corporate investment. The findings support the hypothesis that firms adjust their investment decisions to offset an increase in agency costs, which in turn enables them to access outside financing on more favourable terms.

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