ABSTRACT
Using a theoretical model based on a property rights approach, we argued in Chapter 4 that modern firms could potentially make their operation more efficient by limiting shareholder rights in order to promote employees’ human capital investment. On the basis of standard agency theory, however, advocates of the shareholder model may criticize this argument by noting that limits on shareholder rights lead to less discipline over the operation of a firm. As discussed in Chapters 1 and 4, agency theory considers that a firm’s managers, who are in charge of its daily operations, are economic agents with their own interests and therefore do not necessarily take actions that maximize shareholder value (moral hazard). In the literature on agency theory, examples of managerial moral hazard include excessive expansion of firm size and declining management efforts, which are mentioned in Chapter 1, as well as other examples described below (see reviews by Shleifer and Vishny (1997) and Grinblatt and Titman (1998, ch. 17) for detailed discussions).
