Minority investor protection mechanisms and agency costs: An empirical study using a World Bank–developed approach

Hoang N Pham,Minh C Nguyen

doi:10.5267/j.ac.2021.6.014

Abstract

This study aims to examine the impact of minority investor protection mechanisms on agency costs. All relevant indicators of minority investor protection adapted from the World Bank’s annual ‘Doing Business’ reports, along with concentrated government ownership, are employed with a panel data sample of 135 Vietnamese listed firms during the period 2014–2018. It is found that the following mechanisms are effective in mitigating agency costs and hence agency problems at the firm level: 1) review and approval requirements for related-party transactions; 2) minority shareholders’ ability to sue and hold directors liable for their duties; 3) minority shareholders’ access to internal corporate documents; 4) investors’ rights to approve major corporate investment and sale of asset decisions; and 5) disclosure in annual reports of salaries, bonuses and other forms of remuneration to directors and management. Interestingly, board independence and controlling government shareholders are not confirmed to play significant roles in addressing agency problems. To the best of the authors’ knowledge, this is the first attempt at testing for the impact of minority investor protection mechanisms developed by the World Bank on agency costs at the firm level, hence providing empirical evidence for the adoption of the minority investor protection mechanisms promoted by the World Bank. This study also provides policy implications for selecting effective mechanisms to mitigate agency conflicts between controlling shareholders and minority investors in order to enhance the financial performance of firms in an Asian emerging market.

Highlights

Protecting minority investors is one of the main areas of business regulation employed by the World Bank (WB) to rank economies on the ease of doing business, published annually in the well-known ‘Doing Business’ reports
Based on the knowledge gap and specific context of the study, this paper addresses the two following research questions: (1) Do the minority investor protection mechanisms developed by the World Bank help reduce agency costs in practice? (2) Is government ownership concentration a mechanism to protect minority investors in the Vietnamese context? The main purpose of both research questions is to test the validity of the firm-level minority investor protection mechanisms adopted from the WB and ownership concentration by the government in reducing the agency costs of controlling shareholders
Among minority investor protection mechanisms promoted by the WB, we find that the following mechanisms help reduce agency costs and, mitigate the agency problems associated with minority investors in practice: i) review and approval requirements for related-party transactions; ii) minority investors’ ability to make claims and hold directors liable for their duties; iii) minority investors’ access to internal corporate documents; iv) investors’ rights to approve major corporate investment and sale of asset decisions; and v) disclosure in annual reports of salaries, bonuses and other forms of remuneration to directors and management

Summary

Introduction

Protecting minority investors is one of the main areas of business regulation employed by the World Bank (WB) to rank economies on the ease of doing business, published annually in the well-known ‘Doing Business’ reports. The role of minority shareholders is highlighted in agency problems among multiple principals/owners, notably the conflicts of interest between controlling shareholders and minority shareholders of the firm (e.g., Cronqvist & Nilsson, 2003; Gailmard, 2009; Larsén, 2007; Lin, 2017). This is referred to as the principal–principal problem or type II agency problem (Kumar & Zattoni, 2017), which contrasts with the traditional principal–agent problem as demonstrated by agency theorists such as Berle and Means (1932) and Jensen and Meckling (1976). It is claimed that in most countries in the world, publicly traded firms often have large controlling shareholders and the main agency problem is between controlling shareholders and minority shareholders, rather than between managers and dispersed shareholders (Cronqvist & Nilsson, 2003)

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