The Impact of the Agency Environment on Management’s Long-Term Focus

• Main Authors: HUANG, Sterling Zhenrui, NG, Jeffrey Tee Yong, ROYCHOWDHURY, Sugata, SLETTEN, Ewa
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2015
• Subjects: Agency Environment; Credit Lyonnais; Fiduciary Duties; Investment; Earning Goals; Shareholder Clientele; Accounting; Corporate Finance
• Online Access: https://ink.library.smu.edu.sg/soa_research/1421; https://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=2420&context=soa_research
• Institution: Singapore Management University

The 1991 Credit Lyonnais court ruling expanded the fiduciary duties of managers towards debtholders in near-insolvent Delaware firms. Differences-in-differences tests reveal that innovation efficiency increased among all Delaware firms following the ruling. Further, Delaware firms close to (far from) insolvency reduced (expanded) their R&D expenditures and innovation output. Both sets of firms exhibit a reduced focus on meeting myopic earnings goals, and a shift from transient towards dedicated institutional owners. We conclude that expanding fiduciary duties towards debtholders motivated a longer-term focus at Delaware firms and, as evidenced by improvements in Tobin’s Q and solvency, benefited both shareholders and debtholders.