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THE UAL 1994 BUYOUT AS IT RELATES TO AGENCY THEORY Finance 543 - Advanced Financial Theory February 19, 2001 INTRODUCTION The objectives of this paper is to examine the United Airlines (UAL) 1994 buyout and leveraged recapitalization and affirm certain aspects of agency theory as discussed in Jensen (1989). Agency theory purports that the alignment of a company's management's goals with that of its owners through the enhancement of the monitoring process and incentive systems will result in improved performance. This improved performance should be visible in a company's operations, accounting and stock performance. In UAL's situation, the improved performance was realized shortly after the buyout; however, after observing a longer period (5 years) after the buyout, it appears that UAL's performance declined in relation to the S&P 500 and the Dow Jones Transportation (DJT) indices.

BACKGROUND Table 1 summarizes the 1994 buyout of UAL. With the buyout, 3 major changes occurred that according to agency theory will align management's 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 scrutiny of management's decisions and behaviors leading to a higher accountability and higher performance. In UAL's case the number of board members remained high. In addition, due to time constraints I was unable to discover the equity position of all board members combined. 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, UAL's 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...