Agency Cost Theory Research Articles

Leverage ratio and corporate performance: Do marginal cost and marginal benefit of debt matter

This study examines leverage ratio and firm performance considering marginal benefits and marginal costs of debt to a firm. A total of 16 non-financial firms over a 15 year period (2001-2015) were randomly selected for the study. The panel data were subjected to Panel Least Square, Fixed Effects, and Random Effects regression estimations to test the formulated models in the study. Also the study employed Hausman Test to ascertain whether random effects model is the appropriate model or if fixed effects model is the appropriate model. The results shows that long term debt ratio (LTDR) have positive and significant influence on performance of Nigerian firms measured by Return on Asset (ROA) and Return on Equity (ROE). Short term debt ratio (STDR) on the other hand, established negative and significant effect on ROA, and negative and insignificant impact on ROE. STDR accounting for 75% mean value of the total debt ratio of the sampled firms, the researcher therefore, infer that financial structure has negative and significant influence on the performance of Nigerian firms. This outcome is attributed to mismatch of funds and high risk investment (asset substitution effect) resulting to marginal benefits of monitoring and bonding activities less than the marginal costs as noted by agency cost theory. The study therefore concludes that debt is valuable in reducing the agency costs of equity in professionally managed firm but at the same time debt is costly as it increase the agency cost of debt.

Determinants of Financial Efficiency and Performance in Big-Cap Chain Hotels

Chain hotels with $1 billion in market capitalization not only contribute to employment creation and indirectly become a driving force in the regeneration of local economies but also play an essential role in recovering local economies with their high revenue per available room (RevPAR) values. Besides, the financial stability of these hotel chains directly influences the popularity of destinations, resulting in an influx of tourists to nearby regions, which in turn generates an economic contribution to the overall development of the tourism industry. Therefore, the aim of this paper is to determine the financial factors that are affecting the RevPAR (RPR), their role in the industry, and the validity of the agency cost theory of nine chain hotels that have at least $1 billion in market capital listed in U.S. stock markets over the period 2013–2022. The results show that, in contrast to the debt service coverage ratio, receivables turnover ratio, and book value per share variables, the day sales outstanding ratio and current ratio have a negative impact on chain hotels' RevPAR.

Capital structure and the firm performance nexus: the moderating and mediating roles of agency cost

PurposeThe purpose of this study is to examine the linear and non-linear relationship between capital structure (CS) and firm performance (FP) and the moderating and mediating roles of agency costs in the CS-FP nexus.Design/methodology/approachThis study used static and quadratic panel data regression models to examine the linear and non-linear relationships and structured equation models to analyze the mediating effect of agency costs in the CS-FP nexus of 38 listed non-financial Mauritian firms from 2009 to 2019.FindingsLeverage has a significant negative effect on FP supporting the pecking order theory. Agency costs are significantly and positively associated with FP. There is a strong non-linear relationship between leverage and FP supporting the trade-off and agency cost theories. Agency costs are an important moderator and mediator in the CS-FP nexus. Overall, the sensitivity analyses showed that the results were robust.Practical implicationsFirms need to carefully consider the levels and types of debt and equity in their CS involving the use of dynamic strategies to adjust CS in response to changing economic conditions and FP. The moderating effect of agency costs may guide firms in optimizing CS and may contribute to corporate governance discussions, emphasizing the importance of aligning interests to foster sustainable business practices.Originality/valueThis study adds to the extant literature by providing new evidence on the non-linear relationship between leverage and FP and the moderating and mediating roles of agency costs in the CS-FP nexus in emerging capital markets, where such studies are rare.

The Impact of Stock Price Crash Risk on Bank Dividend Payouts

In this study, we examine whether and how banks employ dividend payout policies in response to the risk of stock price crashes. Using a sample of U.S. banks, we find that banks increase their dividend payouts when faced with a higher risk of stock price crashes. In addition, we find that well-capitalized banks tend to pay more dividends when the risk of a stock price crash is elevated. This aligns with the regulatory pressure theory that banks distribute dividends when they have sufficient capital that meets or exceeds the regulatory standards. This is also in line with the signaling theory that dividend payments reflect a bank’s confidence in its financial health. Furthermore, we find that financially opaque banks tend to make more dividend payments when they are at a higher risk of stock price crashes. This supports the agency cost theory, suggesting that dividends counterbalance the need to monitor bank managers in less transparent reporting environments.

Dividend Payments by Russian Companies: A Signal to the Market or a Consequence of Agency Conflicts?

The article analyzes the dividend policies of Russian companies using two dividend payment theories: signaling theory and agency cost theory. A sample of 30 Russian companies over the period 2010–2021 is used. To test the applicability of signaling theory, pooled regression and fixed effects models are developed. It is shown that an increase/reduction in dividend payments exceeding 20% in the current year allows one to predict an increase/decrease in the return on assets in one or two subsequent years (in comparison to the year preceding dividend payments). However, the growth rate of dividend payments shows no stable relationship with the future return on assets. To test the applicability of agency cost theory, a Tobit model is used with the participation of a principal majority shareholder represented by the government as the dependent variable. This binary variable is equal to 1 if the government owns directly or indirectly over 30% of corporate stocks and 0 otherwise. The results do not confirm the applicability of agency theory to the Russian market. Government participation in stock capital exerts no significant impact on the dividend payout ratio. These findings contribute to understanding the relationship between a company’s dividend policy and its future financial performance, providing a useful tool for Russian investors.

Parent firm dividend payouts and subsidiary earnings management: Evidence from mandatory dividend policy

Despite the increasing prevalence of business group structures, earnings management within these groups has not been thoroughly explored, particularly concerning the impact of internal decision-making processes. This study fills this gap by investigating the effect of parent firm dividends on the earnings management of subsidiaries within a group. Using the establishment of China’s State-owned Capital Operating Budget System as an exogenous shock, we find that parent firm dividends significantly reduce the earnings management of subsidiaries. A mechanism analysis reveals that the improved earnings quality is primarily driven by the increased financing demand due to net capital outflow at subsidiaries rather than the agency problem mechanism based on dividend agency cost theory. Parent firm dividends primarily reduce downward earnings management and have a stronger influence on subsidiaries with shorter control chains. Heterogeneity analysis shows that this mitigating effect is more pronounced in firms with weaker external financial support and higher information asymmetry. Overall, we analyze how dividends paid by state-owned parent firms affect earnings management among their subsidiaries, offering valuable insights to business groups and state-owned entity managers involved in corporate governance.

The Impact of Capital Structure on the Performance of Serbian Manufacturing Companies: Application of Agency Cost Theory

This paper examines the impact of debt in the capital structure on agency costs and therefore on the performance of a company. The efficiency of companies was estimated using two parametric techniques: Ordinary Least Squares (OLS) methods and a Stochastic Frontier Analysis (SFA). The estimated efficiency represents a measure of (inverse) agency costs. Agency costs cause a lower level of efficiency compared to companies that have minimized these costs, and companies that reach the efficiency frontier, in the observed context of this research, are viewed as those that have minimized agency costs. A panel regression model was applied in order to determine the direction and intensity of the influence of leverage and control variables on the initially estimated efficiency of the company. The results of this research on Serbian manufacturing companies show the expected positive effect of capital structure (leverage) on the efficiency of the company, which is in accordance with the predictions of the agency cost theory. The contribution of this research is reflected in the application of efficiency as a performance indicator in the observed context of examining the theory of agency costs, bearing in mind that the measure of efficiency is closer to the theoretical view of these costs.

Corporate Social Responsibility—Performance Nexus: The Moderating Role of Board Size, Board Independence and Board Gender Diversity in Ghana

This inquiry examined the moderating influence of board size, board independence, and board gender diversity on the association between corporate social responsibility (CSR) and firm performance (FP) in Ghana. It utilized data from audited financial statements of all 36 firms listed on the Ghana Stock Exchange, spanning 2010–2020. The study espoused system-GMM for the empirical estimation. Findings show that CSR demonstrated significantly positive relationship with FP, consistent with the stakeholder theory, which is aligned with Carroll’s four-factor-pyramid theory but inconsistent with the agency cost theory. Again, findings depict that all three board structure elements moderated the relationship between CSR and FP.

Propose Research Models and Hypotheses on the Impact of Current Ratio, Return on Assets, Total Assets Turn Over, Leverage Index, Total Accrual on Total Assets to Dividend Payout Ratio for Manufacturing Enterprises

The dividend payout ratio is an important criterion for investors to evaluate the performance of a business. However, determining the level and rate of dividend payment has a great influence on the development strategy and business activities of the enterprise in the future. Therefore, the decision on the dividend payout ratio is always considered and considered carefully by businesses. The objective of this study is to propose a model and develop a research hypothesis so that investors and management can consider the factors affecting the dividend payout ratio. The article uses two research methods, which are the document review method and the meta-analysis method. The authors have proposed three theories including signal theory, agency cost theory, optimal capital structure theory and presented the results of outstanding studies. Analyzing the theoretical basis and reviewing the research, the authors have drawn the financial indicators that affect the dividend payout ratio, namely Current Ratio, Return on Assets, Total Assets Turn Over, Leverage Index. Combining these factors and proposing a new factor, Total Accrual on Total Assets, the authors have built a model of 5 independent variables, respectively Current Ratio, Return on Assets, Total Assets Turn Over, Leverage Index, Total Accrual on Total Assets and dependent variable Dividend Payout Ratio. The article also builds research hypotheses for independent and dependent variables. According to the hypothesis stated, these variables have an impact on the dividend payout ratio of the enterprise and when the independent variables increase, the dividend payout ratio will increase accordingly. The proposed model will be a means of supporting investors and the management board to have an appropriate plan to achieve efficiency for both parties in investment and production and business.

Corporate governance, policies, and outcomes: The appointment of military connected boards and sustainability

AbstractThis paper explores whether a military connected board is an effective corporate governance mechanism, leading to sustainable corporate policies and outcomes. Appointing military‐experienced directors could be a firm's good and ethical business strategy if it positively influences firms' decision making process and eventually outcomes. Relying on over 6800 firm‐year observations over the period of 2000–2018 in the Thai stock market, we find military connected boards mis‐utilize firms' resources, representing a weakening governance mechanism―in line with agency cost theory. Specifically, firms with military officials on their boards are highly levered, keep low cash reserves, pay low dividends, but underinvest, and historically underperformed. However, we find a positive relationship between military connected boards and firm value, measured by Tobin's Q, representing potential future growth and supporting resource dependency hypothesis. Although backward‐looking analyses point toward irresponsible and unsustainable corporate policies which ultimately destroy corporate outcomes, forward‐looking evidence sees a good use of military connected board members in bidding on the government's projects.

The effect of capital structure, operating efficiency and non-interest income on bank profitability: new evidence from Asia

PurposeThe Asian banking system has been appreciated with many distinct qualities including consistent in profitability. Many studies have examined the profitability of Asian banking sector from diverse perspectives. However, studies on bank profitability in connection to the capital structure, operating efficiency and non-interest income are only a few. This study investigates the influence of capital structure as estimated by leverage ratio and long-term debt, operating efficiency and non-interest income on the profitability of the banking industry in 28 countries of Asia.Design/methodology/approachThis paper utilizes fixed effect regression model by involving panel data with sample of 492 banks from 28 countries of Asia for the time span of 15 years from 2004 to 2018.FindingsThe results confirm that an increase in total debt ratio increases the profit margin of the bank as supported by the agency cost theory, suggesting that the debt financing increases the profitability of the firm. In addition, the findings reveal that lowering the operating expenses and managing of costs effectively can boost the profitability of bank. Furthermore, non-interest income plays a vital role when the interest rates are lower. Hence the study suggests that a careful investment in this sector can generate income as well as increase the profit margin of the banking arena.Originality/valueThe paper examines the profitability of bank by including impact of leverage ratio and long-term debt as a measure of capital structure along with the influence of operational efficiency and non-interest income which contributes to the understanding of the existing literature.

Relationship between black ownership, capital structure and company performance

Background: The notion that a company’s ownership structure may affect performance and capital structure has been the attraction, but few studies have looked at the effect of black ownership (BO).Aim: This paper contributes to the literature by examining the possible interactions between BO, performance, and capital structure. Within an agency cost framework, the study indicated that the distribution of equity ownership among black shareholders might significantly influence the performance and leverage of companies listed on the Johannesburg Stock Exchange (JSE).Setting: Altogether 187 companies on the JSE were selected for the period of 2007 to 2014.Method: Data on the sampled companies were sourced from the Iress database, a prominent source of financial data in South Africa, as well as annual reports. The research used a pooled fixed-effects model, random effects model and two-step generalised method of moments in the analysis.Results: The findings of the research provided support for the agency cost theory. The empirical findings indicated that BO was negatively correlated with debt ratio (long-term debt) and performance (Tobin’s Q [TQ]). Surprisingly, BO was positively and significantly correlated with return on assets. Finally, the empirical findings indicated that the proportion of long-term debt and total debt based on market value was lower for BO than for total ownership, while TQ was higher for BO than for total ownership. The finding supports the prediction that companies with a relatively small proportion of black ownership cannot support high leverage and high performanceConclusion: Although the introduction of BO by way of government intervention has been partially successful, more can be done to improve the relationship between the proportion of BO, performance and capital structure in a developing economy.

Are socially responsible firms responsible to accounting? A meta-analysis of the relationship between corporate social responsibility and earnings management

Purpose This study aims to analyze the relationship between corporate social responsibility (CSR) and quality of accounting report, especially on earnings management (EM). In addition, potential moderators of this relationship are examined. Design/methodology/approach After a comprehensive study of potential mechanisms, the authors obtain plenty of empirical results to open the black box of the link between CSR and EM. Meta-analysis is applied on 51 studies from 35 papers. Further analysis is also carried out to determine the moderating effects, such as the cultural and sample selection differences in these papers. Findings CSR is negatively associated with EM. In addition, this effect is moderated by cultural difference, CSR measurement, and year of sample selection. Research limitations/implications Two patterns of the hypothesis between CSR and EM are confirmed based on agency cost theory, a theoretical shift of corporate ethics based on organizational moral perspective. Several useful suggestions are also provided for future studies on the empirical model and sample selection. Further research is necessary to clarify the agency cost behind the two theoretical patterns. Practical implications CSR is not a tool for firms to market but rather a strategy to ensure their consistency with moral principles, indicating that management should pay more attention to the potential damage of the incongruence between CSR and accounting reporting quality. CSR reporting quality remains an important issue for legislature to guarantee continued firm operations. Originality/value To the best of the authors’ knowledge, this study is the first to analyze the CSR and EM link using a meta-analysis and to consider its underlying mechanism under the global environment. Previous method design and sample selection are reviewed to provide reference for future studies.

Mergers and Acquisition and Financial Performance of Commercial Banks in Kenya

Commercial banks’ managers and shareholders are always adopting mergers and acquisitions aiming to improve their financial performance, economies, efficiency as well as their liquidity position. However, this doesn’t always turn out to be so since different performances has been experienced by the firms that have undergone mergers and acquisitions in the banking sector. While some studies indicate that mergers and acquisitions have adverse effect, others indicate that it doesn’t have an effect while others have documented that it positively improves performance. In the recent years commercial banks have undergone mergers and acquisitions whereby in the last 20 years a total of 10 acquisitions and 13 mergers have taken place but the performance of these banks remains mixed. Therefore, there was a need to interrogate whether commercial banks’ financial performance is affected by mergers and acquisitions given that the effect is mixed. The study’s specific objectives included establishing the influence of organizational operating synergy, firm size and risk diversification as mergers and acquisitions effects on Kenyan commercial banks’ financial performance. The theories that provided a theoretical justification as well as interrogation of the key study variables are; the Synergistic Mergers Theory, the Agency Cost Theory (ACT) and Resource Based Theory. A causal research design was adopted where a census was conducted on the entire population of the last 20 years’ 10 acquisitions and 13 mergers. This study used both primary and secondary data, which was analyzed with SPSS to generate inferential and descriptive statistics and frequencies. The results of regression and correlation analysis were presented in tables and figures. The study found that organizational operating synergy, bank size, and risk diversification all had a positive and significant impact on the financial performance of Kenyan commercial banks. According to the study, operation synergy had a significant impact on bank financial performance due to lower operating expenses, increased market share, consolidation of operations, and synergies within the banking industry. An increase in bank size will result in effective gains that will be passed on to customers in the form of high deposit rates, lower lending rates, and lower interest rates. However, increasing the size of the bank beyond certain limits indicates a decline in the scale, leading to inefficiency. The diversification of a bank's operations varies depending on the bank. Diversification of risk is a risk-reduction technique that involves allocating investments across a variety of financial instruments. When banks diversify their risk, they reduce the amount of risk they are exposed to in order to maximize their returns. According to the study, Kenyan commercial banks should critically evaluate the merging institutions' overall business and operational compatibility and focus on capturing long-term operational synergies. There is a need for bank policies that place a higher priority on determining and monitoring their loan portfolio, customer deposits, and asset quality. The banks should invest in a broad range of assets such as bonds, stocks, real estate etc so as to reduce the volatility and risk to their portfolio by holding investments that have a low correlation to one another.

Multi‐unit ownership and market power: A study of the lodging industry in Texas

AbstractAs franchisees in the retail and service industries become experienced and acquire local market knowledge, they are likely to own multiple franchised units. Given non‐ (or weak) exclusive clauses in franchising contracts or industry norms, some of these multi‐unit owners are affiliated with multiple franchisors. Agency and transaction cost theories, the classic theoretical framework to analyze franchising, cannot explain this type of multi‐franchisor affiliation because this type of ownership would create incentive problems across franchisors. Conversely, this paper investigates whether this type of the multi‐unit ownership can be explained by the exercise of market power by these franchisees. We test this hypothesis in geographically clustered markets (hotels near the interstate highway exits), where multi‐unit ownership is common. We first show that multi‐unit owners affiliated with multiple franchisors charge higher prices than other franchisors. Then, in our main analysis, we show that one explanation for this pattern is the existence of market power: Without multi‐unit ownership, prices at these hotels would decrease by 9%, on average (and market‐level volume sales would increase by 7.52%). These results help explain why franchisors might be willing to engage in franchising contracts with franchisees that operate units associated with different franchisors.

Capital Structure, Corporate Governance, Equity Ownership and Their Impact on Firms’ Profitability and Effectiveness in the Energy Sector

This paper aimed to research the interrelation between capital structure, corporate governance, equity ownership, and how they affect firm performance. The sample used consisted of 10 leading-energy-sector companies traded in the NYSE, most of which rank among the largest companies in the world by market capitalization, while the US-based ones are also Fortune 500 companies. Over the eleven-year period examined, from 2009 to 2019, a sampling frame of 110 data series was gathered and analyzed using panel data methodologies. The impact of the key parameters of capital structure, corporate governance, and equity ownership was tested using regression analysis (panel data method) on firm performance, measured by profitability. Our results support a significant relation among major capital structure and corporate governance parameters and firm performance, whereas no evidence was found to support a significant impact of equity ownership on the dependent variable found ascertained. Furthermore, our findings support that in our sample firms, pecking order and agency cost theories play an important role in the financing of these firms, while static trade and irrelevance theory find no support.

Financial Structure and Financial Growth of Financial Firms Listed at Nairobi Securities Exchange, Kenya

Decline in performance deter investor from investing in firms. As such, the firms struggle to raise funds for their operations. The purpose of this study was to establish the effect of financial structure on financial growth of financial firms listed at Nairobi Securities Exchange. The study aimed to evaluate the effect of short term debt, long term debt retained earnings and share capital on financial growth as well as how they are moderated by firm size on financial firms. The theories informing the study included Modigliani-Miller theory, Trade-off Theory, Pecking Order Theory and Agency cost theory. This study was guided by the positivism philosophy and a descriptive research design. The target population of the study comprised of 21 financial firms listed at the NSE for a period of 8 years from 2010 to 2017. The findings indicated that a positive and significant relationship between short-term debt and financial growth of the financial firms. Long-term debt had a negative and insignificant relationship with financial growth of the financial firms. Retained earnings had a positive and significant relationship with financial growth of the financial firms. Share capital indicated a positive and significant relationship with financial growth of the financial firms. Firm size was found to be a significantly moderator of the relationship between the financial structure and financial growth of financial firms. The study recommends that policy makers in the financial sector to embrace indicators on short term debts, long term debts, retained earnings, the share capital and firm size on their strategic decision-making. These indicators will further guide in expanding the interpretation of the financial structures in the listed firms at the Nairobi securities exchange and other related firms. Firm size is thus crucial in a finance company due to their market power larger firms are able to charge higher prices and hence earn higher profits. Keywords: Short Term Debt, Long Term Debt, Retained Earnings, Share Capital & Financial Growth

A longitudinal study of corporate social responsibility expenditure and ownership structure of financial firms

There is a dearth of longitudinal studies of corporate social responsibility expenditure (CSRE) and corporate governance in Bangladesh, which has been the impetus for this study. The study aims to identify the relationship between ownership structure and CSR expenditure. The empirical study considered a longitudinal period of 2007–2019 of listed financial firms (banks and non-banking financial institutions) of Bangladesh. The final sample consisted of 461 firm-year observations for 53 firms. The study incorporated a set of theories, including agency cost theory and stakeholder theory. The study applied the ordinary least square (OLS) regression technique to test hypotheses. The results of multiple regression analysis showed that foreign ownership and managerial ownership contribute positively and significantly to CSRE. However, the study did not document any relationship between institutional ownership and CSRE. The study used rigorous and alternative measurement techniques to further verify the findings. It was concluded that value creation from CSRE is highly dependent on the ownership structure of financial firms. The empirical study has significant theoretical and managerial implications. AcknowledgmentComments and suggestions from the discussants and paper presenters and audiences of International Conference on Sustainable Innovation (ICoSI 2020) at Universitas Muhammadiyah Yogyakarta, Indonesia, have been gratefully acknowledged, which helps us to improve the quality of this paper.

An empirical investigation of the impact of firm characteristics on the smoothness of dividend

This paper empirically investigates the smoothness of dividends on non-financial companies in Jordan by applying the asymmetric partial adjustment model. In addition, this research investigated the data for 65 non-financial companies (37 industrial and 28 services) listed on the Amman Stock Exchange (ASE) covering the period 1997–2020. Fixed and random-effects techniques have been applied to check the smoothness of dividends. The results confirmed that the non-financial Jordanian companies smooth their dividends at a moderate rate, our results contradict the signaling theory; we find that large companies smooth their dividend faster than small ones. Furthermore, in line with the agency cost theory, low-leveraged firms smooth their dividends faster than high-leveraged firms. Also, our results confirmed that highly profitable companies smooth their dividend more and this comes in line with the signaling theory.

Factors affecting dividend payment policy: Differences between consumer goods and consumer staples in Vietnam

The factors affecting the dividend distribution policy of companies listed on the Ho Chi Minh Stock Exchange are investigated using the signal theory and agency cost theory (HOSE). To generate empirical evidence, the study collects data from publicly traded and dividend-paying consumer companies over a 12-year period (2009-2020). At the same time, in order to better understand the research problem, the study examines the variations in factors affecting the dividend payment policies of two kinds of consumer companies (consumer staples and consumer discretionary). The findings of the FGLS regression analysis demonstrate that the following factors always affect dividend payment policy, consumer services, and consumer goods companies: earnings per share, debt-to-equity ratio, form of cash, and stock dividend payment. Consumer staples and consumer discretionary corporations' dividend policies are influenced by distinct factors. Consumer products companies have a greater dividend payout ratio than that consumer service companies. The findings provide a scientific foundation for consumer service and consumer products companies to implement more appropriate dividend distribution policies and raise funds through the stock market.