Agency Cost Hypothesis Research Articles

Corporate social responsibility, board characteristics, and family business in Thailand

AbstractExploring the relationship between corporate social responsibility (CSR) strategy, family business, and board characteristics in Thailand provides invaluable insights into how boards of family businesses integrate CSR considerations, leading to responsible business practices and sustainable development in Thailand. Relying on the top 100 listed firms in the Stock Exchange of Thailand and the Refinitiv's CSR strategy score, we find that family business firms or firms with CEO serving as the chairman of board engage less CSR strategy, being consistent with the agency cost hypothesis and the expropriation view of family businesses. Additionally, in line with the resource dependency theory, female directors, independent directors, board tenure, and board size positively influence a firm's CSR. Additional analyses including the Heckman's sample selection bias and 2SLS instrumental variable approaches show that our results are robust and are not driven by unobserved heterogeneity. More importantly, gender diversity is an exemplary governance mechanism as it is the only board characteristic with a positive effect on CSR in both family and non‐family sub‐samples. While board tenure is positively associated with CSR in the non‐family business sample, larger board size and more board independence in the family business positively influence a firm's CSR. Findings from the family business sample support the functional view of board and socioemotional wealth of family firms.

The Development of Types and Measurement of Banking Risk: A Literature Review

Banking is one of the vital industries of every country. Healthy banking supports the stability of a country's economy so banking risks are crucial to be analyzed. The purpose of this article is to identify banking risk and its measurement as well as to explore the comparison of theories and empirical studies of risk in large and small banks. This article was compiled using the literature review method from several studies related to bank risk and its measurement published in the period 1997 to 2020. This study shows that banking risk is currently divided into eight types, namely: credit risk, market risk, liquidity risk, operational risk, compliance risk, legal risk, reputation risk, and strategic risk. Several theories developed in the banking sector include the unstable banking hypothesis, the too-big-to-fail hypothesis, the agency cost hypothesis, and the small bank advantage hypothesis.

Empirical Investigation of Debt-Maturity Structure: Evidence from Pakistan

We examine the empirical determinants of debt-maturity structure of 266 firms listed on the KSE over the period 2000 to 2004 using several variants of dynamic panel data models. We find mixed support for the agency cost hypothesis as our results show that debtmaturity increases with the size of the firm; however, growth options do not have any significant influence on debt-maturity structure. Our results lend unambiguous support to the maturity-matching hypothesis as debt-maturity varies inversely with operating activities and directly with the maturity of long-lived assets. Finally, we find evidence that supports the taxbased hypothesis but no evidence to support the signaling hypothesis. Moreover, the results demonstrate that there is a significant dynamic component in the determination of optimal debt-maturity structure of the sampled firms. JEL classification: G32 Keywords: Debt Maturity, Capital Structure, Panel Data, GMM, Pakistan.

Ineffective implementation of corporate governance? A call for greater transparency to reduce agency cost

This study uses a moderated‐mediation model to examine the conditional indirect effect of corporate governance on agency cost. Based on a sample of 155 firms during the period of 2013–2019, results of our study are consistent with agency cost hypothesis that managers and controlling shareholders make suboptimal investments when disclosure quality is less in firms. The findings of the study have implications for regulatory bodies responsible for ensuring the effective execution of corporate governance mechanisms. Likewise, in response to calls for additional control devices such as voluntary disclosures, it is important to set voluntary reporting standards.

THE MODERATING ROLE OF AGENCY COST ON THE RELATIONSHIP BETWEEN CAPITAL STRUCTURE AND FIRM PERFORMANCE: EMPIRICAL EVIDENCE FROM INDONESIA STATE-OWNED ENTERPRISES

Purpose – The Indonesian government's plan to focus more on infrastructure is an opportunity for State-Owned Enterprises (SOEs) in Indonesia specially in construction sector. Joko Widodo, as the President of the Republic of Indonesia stated, despite various inputs, the government decided to focus on infrastructure development in 2015. With the large-scale construction project, SOEs in construction sector will attempt to achieve an optimal capital structure in order to continue the company’s operations. The purpose of this paper is to explore the moderating role of agency cost on the relationship between capital structure and firm performance. Design/methodology/approach – Using 63 data observations of 7 Indonesia SOEs in construction sector for the period from 2010 to 2019. Multiple Regression Analysis and Moderated Regression Analysis is used to investigates the moderating role of agency cost on the relationship between capital structure and firm performance. Finding – The results indicate that the capital structure has positive effect on ROE. Furthermore, agency cost appears to moderate the relationship between capital structure and firm performance. The means of capital structure and performance before and during Joko Widodo era were analyzed using t-test. Significant difference was found between the groups before and during Joko Widodo era. This result shows that the capital structure and performance of SOEs changed following the infrastructure development policy. Practical implications – This research is to provide further enrichment related to the problem of inconsistency in the relationship between capital structure and firm performance in agency cost hypotheses. In addition, this study provides an overview of the optimal capital structure, especially for SOEs in the construction sector in Indonesia. Originality/value – Despite the extensive research done on the area of capital structure since 1958, understanding in the area is still inconclusive specially in SOEs. The policy of infrastructure development in 2015 insist SOEs to achieve an optimal capital structure in order to continue the company’s operations. Thus, how SOEs manage their capital structure? Keyword Capital Structure, Agency Cost, Firm Performance, SOEs, Construction Sector Paper type Research paper

Unexpected investment, tunnelling and financial constraints

PurposeBased on a sample of 1,435 Vietnamese listed firms over the period from 2005 to 2017, this study examines the sensitivity of unexpected investment to free cash flow and its mechanism.Design/methodology/approachWe tested three hypotheses using two-step system-GMM to investigate investment–cash flow sensitivity for various firm scenarios while accounting for confounding variables.FindingsFirms with negative free cash flow are more likely to engage in underinvestment; conversely, overinvestment is found primarily in firms with positive free cash flow. In terms of the mechanism, while underinvesting decisions are caused mainly by financial constraints, overinvesting behaviour primarily resulted from agency problems, typically in the form of principal-principal conflicts. Interestingly, under the impact of negative cash flow observations, financial constraints tend to decrease investment–cash flow sensitivity. Conversely, the agency costs hypothesis reveals that agency problems are more likely to increase investment–cash flow sensitivity.Originality/valueThese findings not only contribute to the current corporate literature but also provide some important practical implications for stock market investors, corporate managers, and policy-setting bodies, specifically in the Vietnamese market.

How Do Independent Directors View Corporate Social Responsibility (CSR)? Evidence from a Quasi-Natural Experiment

We investigate how independent directors view corporate social responsibility (CSR). Exploiting the passage of the Sarbanes-Oxley Act (SOX) and the associated exchange listing requirements as an exogenous regulatory shock, we document that independent directors view CSR activities unfavorably. In particular, firms forced to raise board independence reduce CSR engagement significantly relative to those not required to increase board independence. Our results are consistent with the risk-mitigation view and the agency cost hypothesis where managers over-invest in CSR to mitigate their own exposure to non-systematic risk. The over-investments in CSR are curbed in the presence of a stronger, more independent, board of directors. Several robustness checks confirm the results, including fixed-effects and random-effects regressions, dynamic panel data analysis, instrumental-variable analysis, and propensity score matching, Lewbel’s (2012) heteroscedastic identification, and Oster’s (2017) method for coefficient stability. We also confirm the risk-mitigation hypothesis by showing that CSR activities reduce firm risk significantly. Our research design is much less vulnerable to endogeneity and is therefore likely to show a causal effect of board independence on CSR.

Revisiting Managerial Ownership and Firm Value in the Absence of Market Forces: Evidence from Singapore and Thailand

This study examines the effect of managerial ownership on firm value in capital markets where outside governance mechanisms to discipline managers are weak or non-existent. We hypothesize that strong market forces in the U.S. confound the effect of managerial ownership on firm value, i.e., the convergence of interest argument. We test the hypothesis using data from 112 firms from Singapore Stock Exchange and 205 firms from the Stock Exchange of Thailand prior to the Asian financial crisis in 1997 when the market forces were weak, yet the investor protection was sufficient to prevent outright appropriation from management. For ease of comparison, we use methodologies from studies done on the U.S. sample firms during the same study period as ours. We find that, both in Singapore and Thailand, firm value is a function of managerial ownership, and the relation is of the famous inverted U-shaped. Moreover, the relation is robust under different model specifications. The results from Thai sample, with weaker market forces than in Singapore, lend support to many agency cost hypotheses advanced in the U.S. Our results provide useful implication for investors in emerging and frontier markets where outside governance mechanisms are yet to be fully developed.

How do independent directors view corporate social responsibility (CSR)? Evidence from a quasi‐natural experiment

AbstractWe investigate how independent directors view corporate social responsibility (CSR). Exploiting the passage of the Sarbanes‐Oxley (SOX) Act and the associated exchange listing requirements as an exogenous regulatory shock, we document that independent directors view CSR activities unfavorably. In particular, firms forced to raise board independence reduce CSR engagement significantly relative to those not required to increase board independence. Our results are consistent with the risk‐mitigation view and the agency cost hypothesis where managers over‐invest in CSR to mitigate their own exposure to nonsystematic risk. The over‐investments in CSR are curbed in the presence of a stronger, more independent, board of directors. Several robustness checks confirm the results, including fixed‐effects and random‐effects regressions, dynamic panel data analysis, instrumental‐variable analysis, propensity score matching, Lewbel's heteroscedastic identification, and Oster's method for coefficient stability. We also confirm the risk‐mitigation hypothesis by showing that CSR activities reduce firm risk significantly. Our research design is much less vulnerable to endogeneity and is therefore likely to show a causal effect of board independence on CSR.

Determinants of the choice of share buyback methods: A study in India

This study examines signaling, excess cash flow, substitution, leverage, agency cost, stock and liquidity hypotheses by considering firm-specific parameters to find out their impact on selection between tender offer and open market method while doing buyback. This study is based on the basic premise that the rules and regulations those govern these two methods are completely different and have different objectives. This study takes 430 non-financial buybacks from 1998–1999 to 2017–2018 for analysis and these buybacks segregated in terms of tender offer (176) and open market methods (254). In this study, both univariate and multivariate tests have been employed. T-test and Wilcoxon rank sum test are used for univariate analysis, and logistic regression is used for multivariate analysis. The empirical findings corroborate the evidence that free cash flow hypothesis, leverage hypothesis, agency cost hypothesis and liquidity hypothesis are the prime motivators for choosing of tender offer than open market share repurchase. This study finds that dividend paid and choosing of tender offer are substitutes. The results also support the notion that for correcting short-term undervaluation firms choose tender offer rather than open market methods. This study is the first comprehensive analysis in the Indian context to find out the motivations behind the selection of share repurchase methods.

Exchange Rate Risk and Corporate Hedging: Evidence from Turkey

ABSTRACT The aim of this study is to investigate the effect of exchange rate risk on corporate hedging in Turkey. Our panel logit analysis for the period 2009–2015 favors the financial distress hypothesis of hedging rather than the agency cost or investment opportunities hypotheses. The US dollar exchange rate affects the likelihood of currency risk hedging more than the conventional firm-specific determinants of corporate hedging especially after the Fed tapering period. Our findings reveal that, as the dollar exchange rate rises, firms increase their hedging activity since they carry considerable amount of debt in dollars, particularly aftermath of the global financial crisis.

Does gender diversity in bank boards matter? Evidence from public bailouts

We are the first to examine the impact of gender diversity in bank boards on the probability and size of public bailouts. Our findings, based on a sample of listed European banks over the period 2007-2013, suggest that banks with a more gender-diverse board are less likely to receive a public bailout, and receive a lower amount of bailout funds (in the form of credit lines and capital injections) as a percentage of total assets. Specifically, an increase by one standard deviation in gender diversity decreases the probability of a bailout by at least 4%. Gender diversity is also negatively related to bank risk as proxied by the ratio of non-performing loans to total loans and positively related to bank profitability as proxied by ROA. Furthermore, consistent with previous literature, we also find that more gender-diverse bank boards have higher payout ratios, consistent with an agency costs hypothesis. Our findings are robust to a variety of econometric techniques, including instrumental-variables estimation.

Empire Building and Corporate Social Responsibility

In this paper, we investigate whether and to what extent corporate social responsibility (CSR) influences empire building. To derive our testable hypotheses, we use the prevalent agency cost hypothesis and develop a behavioral traits framework, which is grounded in the upper echelons theory. Using a large sample of firms in the US, we find that socially responsible firms exhibit a lower propensity to engage in empire building activity. In addition, firms with high CSR activities are also less likely to engage in mergers and acquisitions and if they do, they pay lower bid premium to target firms and make value maximizing acquisition decisions. A direct examination of the behavioral traits theory shows evidence consistent with the view that CEO overconfidence and narcissism reduce CSR activity but increase empire building. Overall, our results are consistent with the behavioral traits theory but are inconsistent with agency theory in the context of empire building.

Change in Bank Equity Stakes before Merger Completion

This study investigates the relationship between the changes in the shareholdings of the institutional financial/ investment professionals and the firm-specific characteristics of the acquiring companies prior to merger completion. The present study thus serves to identifying the factors dominating investment behaviors of acquiring firms. Both total and average changes in their ownership are considered to test the popular agency and signaling hypotheses. Evidence shows that commercial banks are more likely to increase their equity holdings of those businesses with increasing current liability and decreasing profitability. The former supports the signaling hypothesis but the latter suggests the agency cost hypothesis is correct. Investment banks, on the other hand, prefer those with increasing assets and a stable financial status. A competitive relation of these financial experts is also presented in terms of the pursuit of greater controlling power over the board against each other before the merger completion date.

Agency Costs of Moving to Tax Havens: Evidence from Cross‐border Merger Premia

AbstractManuscript TypeEmpiricalResearch Question/IssueThis paper explores the valuation effects of the tradeoff between tax avoidance and corporate governance through tax haven M&As. Firms can achieve tax savings by selling to an acquirer based in a tax haven, making the newly created multinational a haven resident. Changing a firm's tax home through a 100 percent acquisition is also accompanied by a change in legal system and corporate governance. Therefore, tax savings could come at the expense of corporate governance degradation making the value implications of such tax avoidance attempts an important empirical issue.Research Findings/InsightsUsing an international sample of cross‐border M&As from 1989 to 2012, we find value evidence supporting the agency costs hypothesis. For 100 percent M&As, a lower target premium is associated with those transactions where the tax haven acquirer has weaker investor protection than the target.Theoretical/Academic ImplicationsOur findings provide value evidence regarding the agency costs of tax‐motivated M&As as a result of the secrecy laws and limited investor protection of tax havens.Practitioner/Policy ImplicationsThis study provides a perspective for executives of multinational firms to take into account the value consequences associated with secrecy laws and weak investor protection while considering a possible relocation to tax havens. It also offers further insight to policymakers concerning the costs of limited investor protection and lack of transparency.

Is there Informational Value in Corporate Giving?

In this article, we propose that giving in cash and non-cash (in-kind) differ in their relation with the giving firm’s future corporate financial performance (CFP) and only cash giving is associated with future CFP. Using a novel dataset from ASSET4 that differentiates corporate giving over a sample period of 2002–2012, we examine three competing hypotheses: (1) agency cost hypothesis that cash giving reflects agency cost and destroys value for shareholders, (2) investment hypothesis that cash giving is an investment by management that aims for better future return, and (3) information hypothesis that cash giving has informational value to shareholders as cash is a critical resource at a firm and giving is a decision by managers who are insiders. We find that indeed, only cash giving is positively associated with future CFP and firm value, measured by Fama–French five-factor abnormal risk-adjusted stock returns, future return on assets, and Tobin’s Q. In addition, we find that the positive association exists only between excess, i.e., unexpected, but not expected cash giving and future CFP. Our empirical findings support the information hypothesis, but neither the agency hypothesis nor the investment hypothesis, and are robust to a number of endogeneity tests, including orthogonalized cash giving, instrumental variable regression using geography-based instruments, and propensity score matching. Furthermore, we show that the positive association between future CFP and unexpected cash giving is only pronounced at firms with good governance and relatively higher sales growth where agency problems are less likely, and at firms with no alternative mechanisms to demonstrate the strength of cash flow. Additionally, we do not find evidence that suggests in-kind giving to possess any informational value.

Is There Informational Value in Corporate Giving?

In this article, we propose that giving in cash and non-cash (in-kind) differ in their relation with the giving firm’s future corporate financial performance (CFP) and only cash giving is associated with future CFP. Using a novel dataset from ASSET4 that differentiate corporate giving over a sample period of 2002-2012, we examine three competing hypotheses: (1) agency cost hypothesis that cash giving reflects agency cost and destroys value for shareholders, (2) investment hypothesis that cash giving is an investment by management that aims for better future return, and (3) information hypothesis that cash giving has informational value to shareholders as cash is a critical resource at a firm and giving is a decision by managers who are insiders. We find that indeed, only cash giving is positively associated with future CFP and firm value, measured by Fama-French five-factor abnormal risk adjusted stock returns, future return on assets (ROA) and Tobin’s Q. In addition, we find that the positive association exists only between excess, i.e., unexpected, but not expected cash giving and future CFP. Our empirical findings support the information hypothesis, but neither the agency hypothesis nor the investment hypothesis, and are robust to a number of endogeneity tests, including orthogonalized cash giving, instrumental variable regression using geography-based instruments, and propensity score matching. Furthermore, we show that the positive association between future CFP and unexpected cash giving is only pronounced at firms with good governance and relatively higher sales growth where agency problems are less likely, and at firms with no alternative mechanisms to demonstrate the strength of cash flow. Additionally, we do not find evidence that suggests in-kind giving to possess any informational value.

Capital Structure and Firm Efficiency: A Case of Pakistan

This study investigated the effect of capital structure on firm performance using the agency cost hypothesis and reverse causality hypothesis. For the firms listed on the Karachi Stock Exchange under the textile industry, from 2008-2012, data envelopment analysis (DEA) was used to construct a frontier to measure firm efficiency. Efficiency risk hypothesis and franchise value hypothesis were tested to find out the effects between efficiency and leverage. The results suggested that ownership structure and leverage had a positive relationship (efficiency risk hypothesis) between them. The agency cost hypothesis supported the positive effect of leverage on efficiency. Convergence of interest, that is, concentrated ownership, had a positive effect on firm performance.

The likelihood of management involvement, offer premiums, and target shareholder wealth effects: Evidence from the 2002–2007 LBO wave

This study analyzes the likelihood of management's involvement, the determinants of the offer premium and the market's reaction to the target in order to evaluate the pervasiveness of the agency cost motive and the information asymmetry motive in LBO transactions in the most recent LBO wave. In addition, we consider the role that market volatility plays in the key elements of LBOs. There is strong evidence to suggest that market volatility plays an important role in determining all three elements under investigation due to its effect on the market value of the firm. In addition, management's involvement has a strong positive effect on offer premiums indicating that positive information asymmetry remains to be a motive for management's involvement in LBOs. The agency cost hypothesis is also supported in all three analyses and there is evidence that increased financial distress costs are a concern to private equity groups.

Capital structure, ownership concentration and firm performance: Evidence of reverse causality hypothesis in ASEAN countries

This study aims to examine effect of capital structure and ownership structure on firm performance. In addition, this study also examines the existence of reverse causality of the relation between capital structure and performance of firms in three ASEAN countries. We test the reverse causality hypothesis of firm performance to capital structure, which is viewed in light of two competing hypotheses: the efficiency-risk hypothesis and franchise-value hypothesis. In general, the results support the agency–cost hypothesis, and confirm reverse causality hypothesis in in the sample firms, through the existence of entrenchment effect in firms with the lowest and highest level of ownership concentration and the franchise value hypothesis.