Governance, product market competition and agency costs: evidence from the UAE

Abstract

Relying on two years' observations of 74 United Arab Emirates (UAE) listed firms, we examined the association between governance mechanisms (board size, audit committee, percentage of independent non-executive directors, external auditor, firm leverage and product market competition) and agency costs while controlling for firm size and industry type. We also utilised four different proxies to measure agency costs (asset utilisation, audit fees, expenses ratio and free cash flow measures) to test whether the effect of product market competition on agency costs is substitutive or complementary to internal governance mechanisms. The results show that the percentage of independent non-executive directors and type of external audit significantly influence proxies of agency costs when product market competition is factored out. However, this effect disappears when regressions include product market competition, suggesting that the competitive position of a firm has a substitutive effect to internal governance mechanisms.