Tue Aug 5 05:04:55 EDT 1997
EHS Abstract Submission
(c) 1997 EH.Net
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Name: Pierre-Cyrille Hautcoeur
Email: hautcoeu at fas.econ.rutgers.edu
Institution: Rutgers Univeristy and CRNS, Paris
Co-author: None
Title: Information Asymmetries, Agency Costs, and
the Financing of French Firms, 1890-1939
Internet Address
of abstracted work: Not available on the Internet
By mail:
Delta
Ecole Normal Superieure
48, Bd. Jourdan
75014 Paris, France
Language: English
Abstract:
This paper presents and tries to solve the paradox represented
by the development of the French capital market in a context of
high agency costs. The first part of the paper presents a new
description of the development of the French capital market from
1890 to 1939 on the basis of new individual data on the issues
realized by all the stock market-listed firms (around 1,000
firms). It shows that the stock market not only broadened by
listing more firms, but also deepened, since firms issued more
stocks and bonds, and these issues represented a larger share of
their total financial resources. We turn thereafter to a
description of the agency costs resulting both from asymmetric
information and a very insufficient legal and regulatory
framework. Since the mere idea of agency costs is based on the
expectations of the agents participating the market, we base our
description of these agency costs on the legal flaws observed
most frequently by contemporaries. This provides some indicators
that may be considered (both for contemporaries and for us) as
good proxies for agency costs.
The third part of the paper consists of a quantitative estimate
of the influence of agency costs on French firms' finance both at
an aggregate level and at the individual level of all listed
firms. We try to measure for different periods the effect of the
indicators of agency costs described previously on such variables
as the relative shares of market vs. internal finance or the
share of bonds relative to stocks in market finance. We show
that the influence of agency costs is effective since firms
presenting signs of a higher risk for savers are not able to
issue securities as easily as the others. On the other hand, it
is difficult to find any sign of an influence of agency costs at
an aggregate level, whether comparing different industries for
the same period or comparing different periods. This suggests
that a firm's behavior vis-a-vis its shareholders had no
externalities on similar firms, and that the market was able to
select "good" firms.
A last part of the paper tries to explain why an important
number of firms chose to adopt agency cost-creating behavior,
even being listed on the stock exchange, and why the effect of
agency costs proxies is occasionally limited. We show that
agency cost-creating behaviors could result from the pursuit of
family control preservation, and that outside shareholders did
not leave either because of the protection represented by the
firm's commitment to distribute high dividends or because of the
protection represented by high liquidity in the market for their
securities. We conclude that the actual functioning of the stock
market during this period was more complex than is usually
recognized but not less efficient. The most important
consequence of these features is that the stock market's
functioning or the savers participating in it cannot be made
responsible for the low investment rate and the limited size of
French firms of this period relative to those of other rich
countries.
Bibliography: Hautcoeur, Pierre-Cyrille. "Information
Asymmetries, Agency Costs, and the Financing of French Firms,
1890-1939." Paper presented at the third World Congress of
Cliometrics, Munich, Germany, July 1997.
Subject: B
Geographical Area: 4
Country/Region: France
Time Period: 7, 8