Agency Cost Theory Research Articles

Determinants of dividend policy in Palestinian banks

This study aims to examine whether the dividend theories that were principally developed for non-financial companies in developed institutional environments can explain the dividend policies of banks in Palestine, an emerging market with a high level of uncertainty. It also aims to determine the main factors affecting the banks’ propensity to pay dividends and the banks’ dividend payout ratios. The study uses pooled Probit and ordinary least squares regressions to analyze 10 years of data from all listed banks in the Palestine Stock Exchange Market. The results indicate that agency cost, signaling, and regulatory pressure theories are valid for Palestinian banks. In addition, the analysis shows that bank size, profitability, and capital adequacy are the main positive determinants of Palestinian banks’ propensity to pay dividends and of the dividend payout ratios. Furthermore, after winsorizing the data, the results were found to remain consistent. Finally, the results of a general dominance analysis revealed that bank size is the most important determinant, followed by bank profitability and bank capital adequacy, all three of which positively influence dividend policy decisions in Palestinian banks. This study is among the first to investigate dividend policy determinants in the financial sector. Moreover, this study is conducted in Palestine, an emerging economy. Furthermore, unlike prior studies, this study considers banks’ propensity to pay dividends and banks’ dividend payout ratios concurrently when analyzing the dividend determinants in order to make a significant contribution to solving the dividend determinant puzzle.

Behavior of Company Performance in Response to Dividend Policy: An Analysis of Textile Sector Listed in Pakistan Stock Exchange

The current study explains the relationship of dividend payout policy on the business performance of companies that exist in textile of Pakistan. 100 companies are selected from textile sector. Relationship of dividend payout policy and business performance was controlled with four variables based on relevant theories. These variables include size of company, growth of company, leverage (debt to equity ratio) and corporate governance index. Panel data is collected from 2012-2017 (six years) and then analyzed with unit root, descriptive statistics, correlation analysis, OLS regression, Lagrange multiplier, Huasman test, Fixed effect and Random effect models. Following key findings for each research objective were obtained by applying the adopted research method on the data through the adopted method of analyses: The results of the study show that in textile companies, a negative relationship occurs between dividend payout policy and their profitability. Furthermore, size of the firm according to the pecking order theory and leverage as per the agency cost theory came out to have a significant controlling effect on this negative relationship.

Debt Policy and Financial Performance of Commercial Airline Companies in Kenya

The air transportation sector is important for the development and economic progress of the country. It facilitates many segments of the economy such as tourism, manufacturing, horticulture and hotels. The airline industry contributes billions of shillings to the economy and provides employment to thousands of Kenyans. For example, in 2017 the airline industry in Kenya contributed Kshs. 300 billion to the economy. The airline sector supports 620,000 jobs directly and indirectly (International Air Transport Association (IATA), 2017).However, during the period 2013 -2019 the cumulative performance of the sector were losses of approximately Kshs. 30 billion. Researchers have attributed this poor performance to numerous factors key amongst them is the financing and financing costs. These challenges have led to the closure and/or collapse of a number of local airline companies. This research project investigated the effect of debt policy on the monetary performance of airline firms in Kenya. The main objective was achieved by using sub-objectives which were to establish the effect of debt limits, debt structuring, debt issuance, and debt risk management practices on the financial performance of commercial airline companies in Kenya. The study was anchored on the Modigliani and Miller Theory, Agency Cost Theory, and Pecking Order Theory. The descriptive research design was used to answer the research hypotheses. The target population for the study were all the forty-eight air line companies approved to operate in Kenya as at 31/12/2020 while the target respondents were the finance directors. Census sampling was used. The data was analysed using statistical packages for social sciences. The data analysis consisted of descriptive and inferential statistics. The results showed that the limits on debt had an inverse and insignificant effect statistically on the financial performance of commercial airline companies as deduced from a coefficient of -0.547 and critical level of 0.204. The study established that debt structuring had a positive and statistically insignificant effect on financial performance as suggested by the coefficient of 0.324 and significance level of 0.363. The study found that debt issuance and debt risk management policies had inverse and statistically significant effect on the financial performance of commercial airline companies in Kenya as implied by coefficients of -1.625 and -1.464 and p-values of 0.005 and 0.000 respectively. The study recommends that the management of the commercial airline firms review their debt policy so that it can be effective and yield positive effects on performance.

Assessment of County Internal Control System on Financial Accountability in Tana River County, Kenya

The public management of funds in Tana River County has been ineffectual and the report of the auditor general has reported massive squandering of the public resources. The poor financial accountability formed the rationale of conducting the study to assess how the county's internal control system influences financial accountability in Tana River County. The study was based on four theories, namely agency cost theory, classical management theory, stewardship theory and information systems success theory. The study employed a mixed methodology and specifically a convergent parallel mixed-methods perspective. The study adopted the descriptive research design. The targeted population for the study was 324 employees in Tana River County. A stratified sampling technique was used to get the sample size of 200 respondents. The data collection instruments comprised of questionnaires and interview guides. The results of the study indicated that monitoring systems, information and communication systems, risk management systems and internal audits explain 67.4% of the variations in financial accountability. The regression results showed that risk management system is positively and significantly related to financial accountability (β=.287 p=0.000). Moreover, it was found that internal audits and financial accountability are positively and significantly related (β=.406 p=0.000). Likewise, the study found that information and communication systems and financial accountability is positively and significantly related (β=.25 p=0.000). The study also found a positive and significant relationship between monitoring and financial accountability in Tana River County. (β=.144 p=0.000). Moreover, it was revealed there is a moderating effect of government policy and regulations on the relationship between internal control systems and financial accountability in Tana River County since the coefficient of determination (R squared) increased to 73.9%. The study recommended that counties need to develop a risk management system to spur efficiency and transparency. There should be an effective management system that could evaluate risks in advance to enables counties to maintain those risks within controlled levels. The internal auditor need to be monitored regularly to minimize the chances of presenting reports with mistakes and exaggerations. There is the need to have internal reviews of revenue targets during the financial year. Moreover, it is recommended stringent measures should be taken against the county employees found with corruption cases. Keywords: Risk management system, internal audit, information and communication systems, monitoring systems, government policy and regulations, financial accountability, Tana River County, Kenya

The behavior of capital structure: evidence from fast calibrated additive quantile regression

In finance, capital structure decisions are crucial due to their impact on the value of a firm. Some theories assert that the value of a firm is irrelevant to those decisions. However, there is a growing literature that criticizes this idea. Those studies are constructed on some modern theories which called trade-off theory, agency cost theory, signaling theory, and pecking order theory. This paper investigates the relationship between optimal capital structure and capital structure components. The annual data gathered from 195 firms traded in Borsa Istanbul for the period 2011-2020 is used. The fast calibrated additive quantile regression approach is chosen because of its superior properties. In that method, there is not a strong assumption about the functional form of the relationships between the dependent variable and the explanatory variables. The results indicate that the relationships between the debt ratios and the capital structure components differ for each quantile and these relations are nonlinear. Furthermore, evidence is found that the relationships might be explained with the modern theories of capital structure.

An Agency Costs Theory of Employee Benefits Plan Law

This Article breaks new ground by using agency costs analysis to conceptualize the relationship between benefit plan sponsors and plan participants. The analysis provides normative insights on how governance mechanisms may mitigate agency costs. It also illuminates how those normative insights can be used to improve positive law. Courts, scholars, and policymakers have long tried to force employee benefit plan relationships into the pigeonholes used in donative trust law, and often bemoaned the results. Changing trends in benefit plan typology and importance have increased the disconnect between the relationships that exist in donative trusts and those in benefit plans. This Article argues that it is time to bring a new lens, agency costs analysis, to bear on the challenges in building governance mechanisms that enable American workers to accumulate the financial resources they need for a secure retirement and decrease the social safety net costs of supporting superannuated individuals.

Impact of Financial Leverage on Firm Profitability: Evidence from Non-Financial Firms Listed in Colombo Stock Exchange- Sri Lanka

Purpose: The aim of this research is to find out the impact of financial leverage on firm profitability of the listed non-financial firms in Sri Lanka. Design/Methodology/Approach: Total of 290 companies listed on Colombo Stock Exchange (CSE) is considered as the population and the sampling process excluded Banking, Finance, and Insurance companies as they have identical financial characteristics. The study analyzed 82 non-financial firms listed in CSE from year 2013 to 2017. Debt to equity ratio and liquidity were considered as independent variable. Further, sales growth and firm size were considered as control variables. Return on assets of the firm measures the profitability of the firms and incorporated as dependent variable. The study used panel regression analysis, descriptive tests, and correlation analysis. Findings: Fixed effect model reveals that there is a negative significant impact of financial leverage on return on assets of the non-financial firms listed in CSE. The study elaborates a high influence on return on assets due to the independent variables considered in the study since the R2 value becomes 85.43%. Originality: The review of the literature reveals that there are limited number of studies have been carried out incorporating all the non-financial firms in recent past considering the time period of 2013 - 2017. Therefore, this study would provide more insights including the firms’ performance during these periods. Further, it was identified that there are contradictions in the previous findings. Therefore, the study provides more insights to examine the performance of non-financial firms due to the incorporation of debt capital during the period of 2013 – 2017. Theoretical and Policy implications: M&M 1963, agency cost theories are providing the arguments over the mix of debt-to-equity proportion in the organizational capital structure. This study considers the non-financial firm’s performance according to its capital structure. This can be justified that the operational structure of financial and non-financial firms is significantly different. Therefore, the capital structure incorporation would provide significantly different impacts in between financial and non-financial firms. Therefore, the study adds more value by analyzing only the performance of nonfinancial firms based on its financial leverage. Research limitations/ Future research directions: The study uses only the secondary data and the five-year period from 2013 – 2017. Future studies can be done increasing the sample size and employing different methods such as case studies, that would provide more insights to the findings of this study.

IMPACT OF CAPITAL STRUCTURE ON ISLAMIC AND NON-ISLAMIC INSTITUTIONS OF PAKISTAN

The prime purpose of this study is to analyze the capital structure impact on the performance of Islamic and non-Islamic financial institutes of Pakistan during the time of 2006-2013. To examine this impact, the researchers investigate empirically what are the outcomes of capital ratio on profitability indicator (EFCROE) of Shariah compliant financial firms as well as interest-based financial firms separately. The estimation technique generalized method of moments has been used for the proposed model. Both models verify the negative association of capital ratio with the efficiency of financial institutions. The lower equity with higher leverage becomes the cause of mitigating the agency cost of the firm and good performance as well. Hence, both models confirm the presence of agency cost theory in the financial sector of Pakistan. However, this effect in the Islamic financial sector is insignificant because of the small magnitude of the Islamic financial sector. The results suggest that managers should increase their debt financial instruments and lessen their equity financing to enhance their performance and the State Bank of Pakistan should take valid and sound steps to promote Islamic financial services in Pakistan

Corporate Governance, Agency Costs, and Corporate Sustainable Development: A Mediating Effect Analysis

The economy is an essential factor in constructing a resilient city, and listed companies play a vital role in the local economy. From the microbehavior of corporate governance, we examine the relationship among corporate governance, agency costs, and corporate sustainable development for a panel sample of 690 state-owned firms in China during 2015–2019. We found that agency costs mediate the relationship between board size, management compensation, debt ratio, dividend policy, and corporate sustainable development. Specifically, decreasing the board size can reduce agency costs and enhance the company’s sustainable development capabilities. The existing compensation system is to the disadvantage of the sustainable development of the company. Increasing the salaries of managers will increase agency costs and reduce the company’s ability to develop sustainably. Although increasing liabilities can reduce agency costs, increasing liabilities will increase financial risks. The bankruptcy costs caused by increasing liabilities are more significant than agency costs, which leads to a decline in the company’s ability to develop sustainably. The implementation of cash dividend policies will help reduce agency costs, thereby increasing their sustainable development capabilities. This also provides new ideas for the Modigliani–Miller (MM) theory and agency cost theory.

Dynamics between ownership structure and dividend policy: evidence from Bangladesh

PurposeThe purpose of this study is to examine the impact of ownership structure such as family, government, institutional, foreign and public on dividend payouts as a representative of dividend policy of nonfinancial firms in Bangladesh.Design/methodology/approachThis study employs a dynamic panel data model, namely, differenced generalized method of moments (GMM), which follows a two-step process. The study uses annual data of a sample of 159 nonfinancial firms of Dhaka Stock Exchange for the period 2008–2017, which constitutes a panel data of 1,590 firm-year observations.FindingsThis study’s findings reveal that family and public ownerships have a significant and positive effect on dividend payouts, while government and institutional ownerships have a significant but negative effect. This study additionally incorporates some very important controlled variables and finds that except for size, all the selected controlled variables, i.e. lagged-one of dividend payout, returns on assets, debts to assets, price-earnings (PE) ratio, age and financial crisis have a significant effect on the dividend payouts. However, the findings support several dividend-related theories or hypotheses, i.e. agency cost theory, dividend stability theory and reputation hypothesis.Research limitations/implicationsThis study could consider some other aspects of corporate governance, as well as other emerging markets and financial institutions to perceive whether the results differ. Also, investigation could be carried out on conventional and Islamic firms individually to observe if the findings are different. However, the researchers are suggested to incorporate these issues in their future studies.Practical implicationsThis study offers an important insight into the relationship dynamics between dividend payouts and ownership structure in the context of an emerging market like Bangladesh. Moreover, it enhances the understanding of the ties of dividend payouts with the firm-specific factors as well as the financial crisis. The findings of the present study have also important implications for managers, policymakers and researchers, who are in quest of directions on the dividend policy of publicly listed nonfinancial firms.Originality/valueMost of the previous studies consider one or two types of ownership to examine the impacts on dividend payouts, while this study uses five types of ownership accompanied by a different data set. Moreover, to the authors’ knowledge, no study in Bangladesh has yet addressed this issue in such a comprehensive manner as theirs.

Firms’ Specific Determinants of Capital Structure: An Analysis into Construction Firms in Malaysia and Singapore

The study aims to examine the firm-specific factors such as firm size, profitability and asset tangibility in the capital structure decisions (leverage) on a sample of twenty construction firms in Malaysia and Singapore from 2009 to 2018, with 200 observations. The sample firms are chosen based on convenience sampling technique and the availability of the data. Prior studies documented inconclusive findings on the determinants of capital structure and different industries tend to reveal different patterns of relationship. In addition, the empirical evidence on comparative analysis between construction firms in Malaysia and Singapore is lacking. Hence, the objective of this study is to extend the prior work by investigating the impact of the determinants on capital structure on the construction firms in Malaysia and Singapore. The study uses panel data analysis to test the effectivity of trade-off, pecking order and agency cost theories of capital structure. The empirical findings reveal positive and significant association between firm size and capital structure for Singapore firms. Meanwhile, profitability and asset tangibility correlate negatively with capital structure. As for Malaysian firms, the three determinants exhibit insignificant association with the capital structure. The study only examines 10 construction firms in Malaysia and 10 construction firms in Singapore, therefore, the small sample size becomes the limitation of the study. Nevertheless, the findings of this study may contribute to the body of knowledge on the importance of some firm-specific determinants such as profitability, tangible assets, and firm size in order to determine the optimal level of capital structure for firms in these countries.

Philanthropic giving of China’s hotel firms: The roles of state ownership, corporate misconduct and executive remuneration

Abstract This study utilizes value enhancement theory, agency cost theory and crisis management theory to scrutinize the philanthropic giving (PG) of China’s listed hotel companies from 2003 to 2018. The results of dynamic panel regression tests reveal that state ownership (company character), corporate misconduct (crisis management determinant) and executive remuneration (agency cost determinant) are influential factors in hotel firms’ PG, but none of the value enhancement determinants can explain PG. Specifically, state ownership is negatively correlated with PG, reflecting low PG in government dominated hotel firms in China. PG is negatively associated with executive remuneration, indicating that hotel managers care more about self-interest than social responsibility. PG is also positively related to corporate misconduct, suggesting that hotel firms use philanthropy to manage a crisis. Finally, the lagged PG has a positive effect on PG, implying that PG is intended to avoid damage to social image and reputation of China’s hotel firms.

Review of the effect of family ownership on capital structure

Family-owned companies occupy a large proportion of enterprises all over the world. It is meaningful for people to understand how family ownership may affect firms’ financing strategies. This paper tends to summarize the results of previous studies. However, different scholars reach different results of the correlation between family ownership and debt levels. Some scholars get the result of positive correlation, some get the negative correlation, and others conclude that the correlation does not exist. We apply corporate finance theories such as the pecking order theory, the agency cost theory, and the trade-off theory to previous studies to explain the differences. In the empirical analysis, we find that sample selection bias and omit variable bias exist in previous works. One significant reason that leads to the collisions among previous researchers is the ambiguous definition of family businesses and the disagreement about the definitions. Hence, we conclude several identities of family businesses and make some suggestions to future researchers.

Stakeholder’ and Resource’ labelled employee treatment practices and firm performance- An Integrative Review & Implications for Future Research

Businesses have grown out of the traditional firm-employee relationships into appreciating employees as key 'stakeholder' instead of 'resource'. However, research regarding how an approach underlying employee treatment practices would serve firms' interest, remains largely incoherent. The paper through an integrative review synthesises relevant and related management literature scattered across various knowledge domains, i.e., stakeholder theory, organisational theory, resource-based theory, agency-cost theory. The paper discusses and offers propositions related to how 'resource-based' and 'stakeholder-based' approaches of employee treatment would influence perceived organisational support and perceived organisational justice by employees, thus impacting firm performance. Viewpoints differing from stakeholder perspective, which influence related management decisions, are also discussed. This study emphasises 'stakeholder' approach of management's decisions as proactive, inclusive and as a sustainable approach for employee treatment. It further stimulates future research in what is still largely missing, an integration of different perspectives for refinement of existing theories.

Determinants of Capital Structure; A Study of Listed Banks in Colombo Stock Exchange in Sri Lanka

This study examines the determinants of capital structure of listed banks in the Colombo Stock Exchange in Sri Lanka. Nine listed banks were taken as samples from the Colombo Stock Exchange for the period of 2007 to 2019. The leverage as dependent variable and GDP growth rate, inflation, size of the banks, Return on Assets, tax, profitability and total debt to equity ratio as independent variables are used to find the relationship between dependent and independent variables. In order to investigate these relationships, panel data least square method was adapted with random effect mode. The findings show that debt to equity ratio tax paid of the listed banks is important as determinants of capital structure of banks in Sri Lanka. However, GDP growth, inflation, size of the banks, Return on Assets, and profitability are found to have no statistically significant impact on the capital structure of the listed banks in Sri Lanka. In addition, the results of the analysis indicate that Pecking Order Theory is pertinent theory in the Sri Lankan banking industry, whereas there is little evidence to support Static Trade-off Theory and the Agency Cost Theory. Therefore, the banks should consider factors appropriately to determine their optimum capital structure in a prudent manner against potential shocks in terms of the regulation stipulated by regulator.

Firms’ Specific Determinants of Capital Structure: An Analysis into Construction Firms in Malaysia and Singapore

The study aims to examine the firm-specific factors such as firm size, profitability and asset tangibility in the capital structure decisions (leverage) on a sample of twenty construction firms in Malaysia and Singapore from 2009 to 2018, with 200 observations. The sample firms are chosen based on convenience sampling technique and the availability of the data. Prior studies documented inconclusive findings on the determinants of capital structure and different industries tend to reveal different patterns of relationship. In addition, the empirical evidence on comparative analysis between construction firms in Malaysia and Singapore is lacking. Hence, the objective of this study is to extend the prior work by investigating the impact of the determinants on capital structure on the construction firms in Malaysia and Singapore. The study uses panel data analysis to test the effectivity of trade-off, pecking order and agency cost theories of capital structure. The empirical findings reveal positive and significant association between firm size and capital structure for Singapore firms. Meanwhile, profitability and asset tangibility correlate negatively with capital structure. As for Malaysian firms, the three determinants exhibit insignificant association with the capital structure. The study only examines 10 construction firms in Malaysia and 10 construction firms in Singapore, therefore, the small sample size becomes the limitation of the study. Nevertheless, the findings of this study may contribute to the body of knowledge on the importance of some firm-specific determinants such as profitability, tangible assets, and firm size in order to determine the optimal level of capital structure for firms in these countries.

Financial leverage and firm efficiency: the mediating role of cash holding

ABSTRACT Agency cost theory suggests that a firm’s financial leverage is important to improve organizational efficiency. Using data of industrial companies of three biggest economies, this study analyzes how debt-financing decision affects firm efficiency and the mediating role of cash holding. We find inverted U-shape relationship between the level of financial leverage and firm efficiency. This implies that firms with optimum capital structure achieve high efficiency. The cash-holding level of the companies negatively relates to the efficiency. We also document that the firms’ that apply more financial leverage are less likely to hold excess cash balances and that the cash holding partially mediates the relationship between the financial leverage and the firms’ efficiency. This suggests that the use of debt financing has the potential to enhance firm efficiency by effectively tapping the free cash flow that would have been misused by the management. The results have important implications for corporate finance since it highlights how financial decisions determine corporate productivity.

Does promoter holding affect financed payout of dividends?

Firms avail themselves of external finance to manage obligations to pay dividends, along with other commitments. Indian firms, which have significant ownership concentration, present a unique opportunity for analyzing the influence of promoter holding on financed dividend payouts. This study also analyzes the dependence of standalone firms (i.e., those that are not part of a business group) on these financed dividends along with the firms in business groups. The study asserts that firm affiliation affects the decision on the type and extent of external capital used to finance payout. Promoter holding has a positive impact on debt as well as equity-financed payouts at standalone firms; the relationship is nonlinear and a higher proportion of promoter holding has a constraining effect on such payouts, supporting the agency cost theory. The size of the firm plays a significant role in firm decisions about financed payouts. Firms with lower operating cash flows and high leverage have a higher tendency to finance their payouts.

FREE CASH FLOW DAN PROFITABILITY TERHADAP FIRM VALUE MELALUI DIVIDEND POLICY PADA PERUSAHAAN MANUFAKTUR TERDAFTAR DI BURSA EFEK INDONESIA.

Firm value playsimportant role in maximizing shareholder profits at a time of rising share prices. Risingcompany share price will improve shareholders' welfare. Firm value is important to investors becauseit is an indicator of the market in measuring the company as a whole. The purpose of the research is toanalyze the influence of free cash flow and profitability on firm value by mediated by dividend policy. This research is based on several theories including Agency Theory, Signaling Theory, Agency CostTheory, Firm Value, Profitability, Free Cash Flow, and Dividend Policy. The object of research s amanufacturing company listed on the Indonesia Stock Exchange in the period 2015-2017 with 60companies as the sample. Analysis techniques used by Structural Equation Modelling (SEM). Theresults of the research include (1), there is a positive and significant influence of free cash flow on firmvalue (2) there is a positive and significant influence of profitability on firm value, (3) there is a positifveand significant influence of free cash flow on dividend policy, (4) there is no influence of profitabilityon dividend policy, (5) there is a positive and significant influence of dividend policy on firm value, (6)dividend policy can’t mediate the effect of profitability on firm value, and (7) dividend policy canmediate the influence of free cash flow on firm value.Keywords : Profitability, Free Cash Flow, Dividend Policy, dan Firm Value

Leverage and bank’s performance: do type and crises matter?

ABSTRACT This study investigates the effect of leverage on banking system performance in the Gulf Cooperation Council (GCC) countries considering the business model differences in the banking industry (commercial and Islamic banks) and the role of the financial crises. Empirically there is a negative relationship between debt financing and the performance of banks, which supports the signalling theory and contradicts the agency cost theory. Bank’s business model is among the factors that affect banks’ performance; commercial banks are more profitable than Islamic banks. The 2007/2008 financial crises affect GCC banks’ performance negatively. After two years of its occurrence, two years were needed until the crises were transferred to the GCC banking system.