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OWNERSHIP STRUCTURE, AGENCY COSTS, AND DISCOUNT RATES
Download This ArticleC.R. Krishna-Swamy, Mary M. Pashley
Abstract
In this paper, we explore the effects of agency costs on discount rates for public sector enterprises as well as private sector enterprises. Ownership structure has a direct impact on agency costs, and discount rates. We show this through an application of the Capital Asset Pricing Model (CAPM) framework. With the addition of agency costs, the discount rate, under uncertainty, for public sector enterprises (PSEs) as well as private sector enterprises (PVTSEs) becomes a variation of the CAPM risk adjusted discount rate plus a premium for agency costs. In some circumstances the impact of agency costs “cancels out,” otherwise it remains a relevant input to the calculation of required rates of return. For PSEs, under risk neutrality, the discount rate is the risk-free rate plus a premium for agency costs.
Keywords: Ownership Structure, Agency Costs
How to cite this paper: Krishna-Swamy, C. R., & Pashley, M. M. (2007). Ownership structure, agency costs, and discount rates. Corporate Ownership & Control, 4(3-2), 240-246. https://doi.org/10.22495/cocv4i3c2p1
