THE UAL 1994 BUYOUT AS IT RELATES TO AGENCY THEORY

THE UAL 1994 BUYOUT AS IT RELATES TO AGENCY THEORY Finance 543 - Advanced pecuniary Theory February 19, 2001 INTRODUCTION The objectives of this paper is to examine the United Airlines (UAL) 1994 buyout and leveraged recapitalization and avouch certain aspects of agency sup maculation as discussed in Jensen (1989). manner theory purports that the alignment of a companys managements goals with that of its owners through the enhancement of the observe process and incentive systems will result in better performance. This improved performance should be visible in a companys operations, accounting and business line performance. In UALs situation, the improved performance was agnize shortly after the buyout; however, after observing a weeklong period (5 years) after the buyout, it appears that UALs performance declined in relation to the S&P 500 and the Dow Jones Transportation (DJT) indices.

BACKGROUND          bow 1 summarizes the 1994 buyout of UAL. With the buyout, 3 major changes occurred that according to agency theory will align managements goals with that of the owners to maximize their wealth. First, participating employees (employees) who owned 55% of the company were guaranteed three board seats (out of twelve in total). Denis (1994) infers that a reduction in board members results in more(prenominal) scrutiny of managements decisions and behaviors leading to a high accountability and higher performance.



In UALs case the number of board members remained high. In addition, overdue to time constraints I was unable to discover the equity position of all board members combine. It is heavily researched as written by Jensen (1989) that a material equity position of board members combined leads to a higher level of monitoring. Second, UALs incentive system was drastically changed when employees received 55% of UAL in stock and preferred stock with their ESOP account. The increase in equity position of the employees should inspire them to...

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