Abstract
This paper examines how free cash flow and equity concentration are associated with agency costs, and how they influence the profitability of insurance firms listed on the Saudi Stock Market. The results indicate that equity concentration has no significant impact on agency costs, free cash flow has no significant impact on agency costs and agency costs have no significant impact on firm’s profitability. The findings of this study do not show any evidence to support the agency theory among insurance firms listed on the Saudi Stock Market.
Highlights
The profitability of firms and the variables which affect the profitability occupy a significant part of corporate financial management literature
Note: Table 2 reports the results of the dynamic panel data two-steps robust system estimation for the impact of equity concentration and free cash flow on agency costs as well as the impact of the agency costs on the performance for a sample of 140 firm-year observation for insurance companies listed on the Saudi Stock Market for the period 2010–2013
The results of the lagged dependent variable in ance firms’ performance in the current period. the first model show that the insurance firms’ The results confirm that the equity concentraagency costs in the previous period have no ef- tion and free cash flow have no significant effect fect on the insurance firms’ agency costs in the on agency costs and agency costs have no sigcurrent period, the coefficient of the lagged nificant effect on insurance firms’ performance. dependent variables in the first model is posi- The results show that the coefficients of tive and not significant
Summary
The profitability of firms and the variables which affect the profitability occupy a significant part of corporate financial management literature. Many studies explore the impact of external factors such as economic growth or recession on the firm’s performance, while others focus on the impact of internal management factors such as the ownership structure and the robustness of financial management. The size of the firm and ownership structure influence the existence and amount of agency costs. The Middle East firms are historically characterized by the concentration of family control and they remain less explored compared to the firms in developed stock markets in research areas such as agency costs and equity concentration and their influence on firm’s performance (Samargandi et al, 2014)
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