Principal-agent Research Articles

Reconciling Tracking Error Volatility and Value-at-Risk in Active Portfolio Management: A New Frontier

AbstractThis article introduces the Risk Balancing Frontier (RBF), a new portfolio boundary in the absolute risk-total return space: the RBF arises when two risk indicators, the Tracking Error Volatility (TEV) and the Value-at-Risk (VaR), are both constrained not to exceed pre-set maximum values. By focusing on the trade-off between the joint restrictions on the two risk indicators, this frontier is the set of all portfolios characterized by the minimum VaR attainable for each TEV level. First, the RBF is defined analytically and its mathematical properties are discussed: we show its connection with the Constrained Tracking Error Volatility Frontier (Jorion in Financ Anal J, 59(5):70–82, 2003. https://doi.org/10.2469/faj.v59.n5.2565) and the Constrained Value-at-Risk Frontier (Alexander and Baptista in J Econ Dyn Control, 32(3):779–820, 2008. https://doi.org/10.1016/j.jedc.2007.03.005) frontiers. Next, we explore computational issues implied with its construction, and we develop a fast and accurate algorithm to this aim. Finally, we perform an empirical example and consider its relevance in the context of applied finance: we show that the RBF provides a useful tool to investigate and solve potential agency problems.

The timing of stock repurchases: Do well-connected CEOs help or harm?

Using a sample of daily repurchase transactions, we find that CEOs with extensive professional networks execute buybacks at higher prices relative to their less-connected peers. This finding survives a large battery of robustness tests and is unlikely to be the product of endogeneity biases. Monitoring by institutional investors, blockholders, and independent directors, as well as low levels of board busyness mitigate the detrimental effect of a well-connected CEO on repurchase timing. Moreover, better-connected CEOs are more associated with insider net sales around repurchase transactions. Overall, our evidence is consistent with CEO-shareholder agency conflict explanations and CEO power mechanisms.

The Role of Latent Information

The pressure of climate change and policy guidance has attracted plenty of enterprises to expand their renewable energy business, presenting an opportunity to investigate whether latent information can contribute to improved performance in their transformation. This context also offers a broader application scenario for studying information management theory. Therefore, this paper explores the above topic using business data from listed Chinese renewable energy companies between 2003 and 2021, focusing on three aspects of latent information related to diversification. The findings reveal that: 1) Market power information plays a fundamental role in explaining the performance enhancement from renewable energy business expansion, and non-dedicated resource information is a significant factor for understanding the enhancement, whereas agency problems have no significant effect. 2) The latent information exhibits notable heterogeneity concerning the expansion of renewable energy business among enterprises with different transformation backgrounds.

Социально-экономические проблемы реализации подходов к обучению в звеньях «индивид-группа-организация», осуществляемых в интересах наращивания объемов знаний

The relevance of the presented study is determined by the fact that as the post-industrial society develops, more and more attention is paid to the knowledge economy, the basic components of which are the generation and training of new knowledge. At the same time, the accumulation of this knowledge by organizations in the competitive struggle is of fundamental importance. Currently, there are quite a lot of approaches to considering training in the individual-group-organization links both as processes and as modeled structures, including in the interests of the strategic development of the organization. At the same time, an obvious drawback of the known approaches is the hypothesis of a monotonous increase in the volume of knowledge in the organization without taking into account the socio-economic problems arising in the process of acquiring and using new knowledge. The purpose of the presented studies is to identify the problems of implementing approaches to training in the individual-group-organization links in the interests of increasing the volume of knowledge, conditioned by the socio-economic aspects of acquiring and using new knowledge in a competitive environment, from the standpoint of strategic development. The scientific novelty of the obtained results lies in the identification of the key problem of the transition from tacit knowledge to explicit knowledge, caused by agency conflicts associated with the rights to this type of intangible asset between an individual generating new knowledge and an organization seeking to convey this knowledge through training to its employees. The practical significance of the research results lies in the possibility of their use in the implementation of approaches to training in the individual-group-organization links both within the framework of the concept of management based on the use of human capital in the 2030s and within the framework of the concept of management based on the use of the intellectual capital of an organization in the 2040s.

The effect of investor protection on forced CEO turnover

PurposeThis paper aims to analyze the direct and indirect effects of investor protection on forced CEO turnover.Design/methodology/approachThe authors investigate 5,175 firm-year observations from 16 European countries over 2012–2018, collect data on four national investor protection indicators, identify 196 forced CEO turnovers and use multiple logistic regression models.FindingsThe results show that a reduction in the degree of investor protection significantly increases the probability of a forced change of the company’s CEO. Furthermore, when the degree of investor protection increases, directors are attributed a lower degree of responsibility in the event of a decline in earnings performance. Therefore, the relation between a decrease in profitability and a forced change of CEO is reduced.Research limitations/implicationsThe research is focused on countries belonging to the European Economic Area and most of the investor protection indicators are derived from surveys. Concerning policy implications, the findings suggest that regulators should focus on the effective enforcement of investor protection mechanisms.Social implicationsThe results confirm that characteristics at the country level have an impact on corporate decisions, highlighting the importance of increasing the degree of investor protection as a means of mitigating agency conflicts and improving stewardship.Originality/valueTo the best of the authors’ knowledge, this study explores a relatively underinvestigated topic as it uses investor protection indicators to jointly evaluate both direct and indirect effects on forced changes of CEO through cross-national research.

Shareholder coordination and stock price crash risk

We construct an indicator of shareholder coordination and investigate its impact on stock price crash risk. We find that shareholder coordination constrains stock price crash risk. Mechanism analysis suggests that this effect is achieved by alleviating agency conflicts and improving the quality of information disclosure. In addition, we find that the role of shareholder coordination in mitigating crash risk is more pronounced in companies with stronger external monitoring capabilities and stronger shareholder long-termism tendencies. In summary, our results suggest that shareholder coordination is instrumental in monitoring management behavior and mitigating bad news hoarding practices within companies.

ESG divergence and corporate strategic green patenting

Based on a sample of Chinese A-share listed companies from 2010 to 2020, we find that ESG divergence motivates companies to engage in green innovation patent applications, but such behavior is more strategic than genuine quality improvement. Following thorough robustness checks, this conclusion remains unchanged. We find that among large-scale enterprises, those with more government subsidies, and those with more severe agency problems, ESG divergence leads to more apparent green innovation behaviors aimed at increasing the quantity and reducing quality. Moreover, we observe that ESG investors magnify the relationship between ESG analysis and strategic patenting.

Co-Owners as a Governance Mechanism for Principal-Principal Agency Problems: An SOE Case

Co-Owners as a Governance Mechanism for Principal-Principal Agency Problems: An SOE Case

О двойных (множественных) косвенных исках бенефициарных владельцев в интересах подконтрольных корпораций

The current stage of economic development requires transparency of asset ownership, which implies disclosure of all levels of corporate structures and final beneficiaries. This trend can be traced in tax, anti-sanction, and bankruptcy legislation. Disclosure of the corporate ownership structure is the main prerequisite for the realisation of the beneficial owner’s right to sue in the interests of a controlled corporation. A formal legal approach that denies such a right creates an imbalance between the interests of investors and the economy as a whole, strengthens the agency problem, which negatively affects the activities of diversified holdings. The circumstances testifying to the violation of the subjective rights of the beneficiary are the unfair actions of the prevailing beneficiary and the management controlled by him in the context of a corporate conflict. The choice between the recovery of the reflected losses in favour of the beneficiary (parent company) and the recovery of losses in favour of the controlled company at the claim of the beneficiary is the main debatable issue. The domestic legal order generally recognises the admissibility of protecting the interests of beneficiaries when making insignificant corporate decisions at the operational level of the holding and making unprofitable transactions by management in collusion with a counterparty.

POLITICAL CONNECTIONS, CORPORATE GOVERNANCE AND INVESTMENT EFFICIENCY: EVIDENCE FROM MALAYSIAN FIRMS

This study investigates the moderating role of corporate governance in the relationship between political connections and investment efficiency. Using a sample of Malaysian publicly listed firms from 2001- 2017, we find that political connections are negatively correlated with firm investment efficiency. Moreover, the relationship is robust with the inclusion of corporate governance mechanisms, which moderated the potential consequences of agency problems in politically connected firms. The evidence suggests that corporate governance appears to be an effective mechanism to improve investment efficiency in politically connected firms. Consistent with the agency costs of free cash flow theory, we also discover that political connections have a more significant detrimental impact on overinvestment compared to their positive influence on underinvestment. Nevertheless, the interaction results in corporate governance hold regardless of overinvestment or underinvestment. Further analysis reveals that domestic institutional ownership, Big Four auditors, and audit committees are effective governance mechanisms, whereas similar observations do not hold for foreign institutional ownership, board size, board independence, and director ownership. Resultantly, high direct policy relevance is provided for governance practitioners and policymakers in monitoring the investment activities of PCFs.

More Money, More Problems? Implications of Excess Cash in Nonprofit Hospitals

This study examines the implications of excess cash in nonprofit hospitals. Using a nationally representative sample of hospitals, I benchmark nonprofit cash holdings against for-profit cash holdings, and find that nonprofit hospitals hold significantly more cash. I consider three potential uses of excess cash in nonprofit hospitals: (a) investment in fixed assets, (b) increased charity care provision, and (c) higher executive compensation. I find that excess cash is associated with investments in fixed assets but not with increased charity care provision. Moreover, I find a positive relationship between excess cash and growth in CEO compensation. The results suggest that while nonprofit hospitals may accumulate cash to finance fixed assets, some of the accumulated cash may be diverted toward executive compensation. Overall, concerns regarding agency problems in nonprofit organizations may not be unfounded.

The Effects of Equity Incentives on Corporate Performance in China

For modern companies, equity incentives are used as a tool to address agency problems. This study examines the long-term impact of equity incentives on corporate performance using data from A-share listed companies in China from 2010 to 2022. The findings suggest that equity incentives can enhance corporate performance for four years after implementation, with the strongest effect observed in the second year. Additionally, there is no significant difference in the impact of equity incentives on corporate performance between state-owned enterprises (SOEs) and non-state-owned enterprises (NSOEs) in China.

Concerted action agreements, corporate innovation, and financial market outcomes: A pre-registered report

This pre-registered study aims to investigate whether and how concerted action agreements enhance corporate innovation and create financial value. Based on theoretical analysis and numerous case studies, we expect to find that concerted action agreements significantly improve corporate innovation. The channels are at least two folds. First, by shielding entrepreneurs from short-term market pressure and enhancing their job security through enhancing their control rights, concerted action agreements spur long-term projects such as innovation. Second, through transferring control rights to entrepreneurs, concerted action agreements also strengthen entrepreneurs' stewardship role, which in turn mitigates agency problems and stimulates innovation. We further test the economic consequences of concerted action agreements and we expect to document that the agreements have a positive influence on firm performance and financial market valuation through enhanced corporate innovation. We also predict that because short-term market pressure and agency costs are high for high-tech firms due to information asymmetry, and because innovation is especially important for high-tech firms, concerted action agreements are most beneficial for high-tech firms. Finally, we predict that as time passes, the positive effects of concerted action agreements may diminish.

History’s view on the principal–agent relationship: including history, context and change. Evidence from three historical cases in the Southern Netherlands

Purpose The principal–agent literature often draws criticism for its ahistorical, acontextual and static nature, particularly when theories such as the agency or the stewardship theory are being used. This is because the field of economics tends to develop universalistic models and theories, excluding history, context and change, which renders them unusable for practitioners whose behavior is (partially) guided by the complex and differing environments in which they find themselves. The purpose of this paper is to contribute to this criticism by investigating how (and if) history, context and change influence the principal–agent relationship. Design/methodology/approach Instead of using the typical economic methodologies to study the principal–agent relationship, this paper makes use of the methodologies of the field of history to investigate how history, context and change affect principal–agent relationships in three cases in the early modern Southern Netherlands (the Dukes of Arenberg, the Roosewalle farm and Abbot De Loose of the Abbey of Ename). This methodology is especially suited, as it results in historical narratives that incorporate all of these three elements. Findings The main finding is that the cases show how history, context and change clearly affect the principal–agent relationship. These aspects are intricately intertwined, as earlier choices and context can cause a change in the principal–agent relationship, this creates a new presence (with an altered history) and sometimes even a new context. This results in a highly dynamic relationship that can evolve in very short periods, mostly in a path-dependent manner. Research limitations/implications The paper advocates by example for a shift in principal–agent research, emphasizing the necessity of considering history, context and change. This study demonstrates that these factors greatly affect the nature of the principal–agent relationship. In doing so, it may provide practitioners with better insights, as real-world principal–agent relationships are indeed impacted by these three factors. Originality/value By using historical methods, this study shows for the first time how context, change and history indeed influence principal–agent relationships. The findings of this paper encourage the development of theories and theoretical frameworks that more closely resemble reality, rather than being universalistic.

CEO inside debt and industry specialist auditor

PurposeThis paper aims to examine the effect of executive compensation incentives, specifically CEO inside debt holdings, on the choice of industry specialist auditor.Design/methodology/approachHigh inside debt holdings are expected to constrain excessive managerial risk-taking and align the interests of managers and outside debtholders. The authors hypothesize that reduced debtholders’ expropriation concerns will decrease the demand for high audit quality, measured by industry specialization. The authors investigate a sample of US firms from 2006 to 2018 using OLS regression and use CEO relative leverage to proxy for CEO inside debt holdings. The authors conduct an additional two-stage least squares regression analysis to address potential endogeneity issues.FindingsThe paper finds that firms with higher levels of CEO inside debt tend not to appoint an auditor with industry specialization. This result is consistent with the notion that inside debt mitigates agency conflicts between managers and debtholders, reducing the demand for high-quality audits as a monitoring mechanism. The paper also finds that among firms which are excessively leveraged, those with higher levels of CEO inside debt tend to appoint an industry specialist auditor.Originality/valueThe findings contribute to the literature on agency cost and auditor choice by demonstrating that CEO inside debt has both substitutive and complementary effects on demand for industry specialist auditors.

Bank-affiliated directors' monitoring, earnings management, and financial reporting quality in emerging markets: Evidence from India

In this novel investigation of creditor governance in an emerging market, this paper examines the monitoring by Indian lenders of firms' earnings management and financial reporting quality through the appointment of a bank-affiliated director to the borrower's board. Specifically, we study the effect of having a bank-affiliated director on the board (a “BDB”), prior to the implementation of India's Insolvency and Bankruptcy Code (IBC). This setting represents a business environment characterized by underdeveloped financial institutions, a weak legal system, and inefficient bankruptcy resolutions. Unlike the U.S., where BDBs play a limited monitoring role, our evidence suggests bank-affiliated directors played an active role in firm governance and lowered earnings management as well as improving financial reporting quality in India during the period of our study. Specifically, we find lower discretionary accruals among firms with BDBs in cross-sectional, pre-post, performance matched, and propensity score matched analyses – signaling higher reporting quality and less earnings management. This finding holds after controlling for endogeneity and when measures of accounting conservatism or earnings persistence are utilized as additional measures of reporting quality. Further, the dampening effect of BDBs on discretionary accruals is more pronounced for companies subject to greater information asymmetry and those prone to agency problems. In addition, firms with BDBs on the board have less volatile ROAs and lower idiosyncratic risk, consistent with BDBs encouraging borrowers to pursue less risky investments to safeguard creditors' interests. As the first examination of the monitoring influence of BDBs on financial reporting quality – and earnings management in particular – in an emerging market, our results provide unique insights for policymakers and creditors seeking to enhance governance and reporting quality of firms in evolving business environments.

The effect of modern information technology on corporate payout policy. Evidence from EDGAR implementation

PurposeThis study uses the Electronic Data Gathering Analysis and Retrieval (EDGAR) implementation as an information shock to examine its effect on corporate payout policy.Design/methodology/approachThis study uses a generalized difference-in-differences approach to assess the causal impact of EDGAR implementation on the US publicly traded firms’ payout policy for a period from 1990 to 1999. The approach captures the difference between changes in the dividend policy of firms subjected to EDGAR implementation (treated firms) and those not subjected to the implementation (control firms).FindingsFirms increase payout ratios and the likelihood of paying dividends after the implementation of EDGAR. Notably, these effects are more pronounced in firms characterized by high agency problems ex-ante.Practical implicationsPolicies designed to improve a firm’s information environment may yield divergent effects on corporate payout policy. Consequently, in countries aiming to promote cash dividends, policymakers seeking to enhance the firm information environment should carefully consider initiatives that will improve minority investors’ access to corporate information.Originality/valueThe findings contribute to the real effects of EDGAR implementation on firm policies, addressing the ambiguity surrounding the economic consequences of EDGAR adoption. This paper also contributes to the existing literature on the impact of information shock on corporate payouts. The findings emphasize the multifaceted influence of information shock on corporate payouts.

Internationalization of Small and Medium-Sized Enterprises: Best Practices and the Emerging Concept of Foreign Champion, an Empirical Investigation

This article introduces a new theoretical concept, the “foreign champion”, which attempts to solve the principal–agent problem and improve academic understanding of foreign market entry decisions by analyzing what experts in the field consider to be best practices. Based on empirical research into the determinants of SME internationalization success, semi-structured interviews (n = 12, t = 5 h 10 min.) were conducted with industry experts, including one academic, government officials, chamber and association leaders, a venture capitalist, and several CEOs, and key testimonies were studied using qualitative analysis software. The results shed light on effective internationalization strategies and common market entry mistakes. Despite the perception of saturation, the prominence of the experts, and the large sample, there may be limitations, such as not covering several regions. The originality of this study lies in its conceptual framework, the insights gained from the select interviews, and a new concept of foreign market entry.

Are the media drivers of R&D?

Research exploring how extra-legal institutional aspects might impact corporate investment policy in innovation is still in its early stages. This lack of research is even greater when it comes to studying the role of media attention in corporate innovation. This study extends prior literature by investigating the relationship between media visibility and research and development (R&D) investment in a continental European context. Using a sample of Spanish listed firms in the 2008–2022 period, results indicate that media attention has a positive effect on corporate innovation. The results provide support for arguments that the media reduce agency conflicts, facilitate fundraising, and increase the reputational risk of internal agents as well as the pressure to meet stakeholder demands and the chances of obtaining external help to develop new ideas and projects. Moreover, we show that media attention encourages innovation in companies who are more isolated from stakeholder demands, who face greater agency conflicts, or who suffer from financial difficulties.

Tournaments and contracts under asymmetric information

In a principal–agent model, we compare tournament and contract schemes, which are both common methods of inducing effort. We assume that an agent’s type, which was private prior to contracting, becomes public during a tournament due to players’ interactions. We show that first-best effort levels can always be achieved in an efficient tournament scheme (ETS), where each agent can upgrade the prize by paying a fee to the principal. Furthermore, we provide sufficient and necessary conditions for the ETS to generate a higher payoff for the principal than the optimal contract scheme (OCS), with examples under mild conditions. In the absence of performance shocks, we provide a rationale for using a combination of tournaments and contracts in the presence of asymmetric information.