The role of regulatory authority in affecting firm performance

Abstract

This paper examines the role of regulatory authority in affecting the performance or value of a firm. The study has used panel data of 120 companies for the years 2000 to 2003 for developing (Malaysia) and developed (Australia) financial markets. The findings of the study suggest that there is a positive relationship between the regulatory authority efficiency and the financial health of a firm. The dual leadership structure results in the value creation for shareholders in these markets as the regulatory authorities force independent CEO to defend the rights of shareholders. On the contrary, the external regime in these markets cannot manage the agency cost of debt as the free cash flow is not utilised efficiently to resolve the principal (shareholders) and agent (managers) conflicts in these markets. Finally, the effectiveness of regulatory authorities results in higher information efficiency and optimal utilisation of assets in the market leading to defending the rights of shareholders.