Does the high required return on shareholders’ equity encourage company managers to be efficient or to make dangerous, adverse decisions?

The required return on shareholders’ equity (RoE) is very high (around 15%). An “optimistic” analysis would conclude that this solves the agency problem between shareholders and company managers, by encouraging managers to be efficient, modernise their company and innovate. A “pessimistic” analysis would conclude that the only way to obtain this high return on equity is for managers to make dangerous choices: increased debt leverage (share buybacks), skewing of income distribution against wage earners, offshoring, search for monopoly rents. An analysis of actual developments shows that both theories are probably correct: some managers have responded by innovating; others by making “dangerous” choices.