Strategic Management of Private Benefi ts in a Contingent Claim Framework

This article uses the continuous time framework of the firm developed by Black, Scholes and Merton to analyze effects of private benefits. We compare the benchmark case (with no private benefit) to a couple of situations where collusions make extraction of private benefits possible. E.g., an ex ante agreement may lead to an adjustment of the firm’s business risk so as to render private benefits innocuous for minority equityholders. We highlight how agreements with minority shareholders or alternatively with creditors can lower the other stakeholders’ wealth. Among other things, we find that private benefits increase default risk and therefore impact all stakeholders of the firm (including suppliers, customers and employees). We investigate situations where managers enjoy a retirement plan. We finally convert private benefits into a premium for the share price, if a control block of shares is to be evaluated. Overall, our results suggest that covenants in loan contracts and/or shareholder activism may limit strategic behaviours and lower or even prevent private benefits.
Keywords: Agency Theory; Private Benefits; Tunneling; Contingent Claim Analysis.
JEL codes: G12, G32, G33.