Agency Problems In Firms Research Articles

Tax-avoidance Effect on Investment Inefficiency: An Examination of Agency Theory

Tax-avoidance activity in firms potentially increases investment inefficiency, arguably due to agency problems in firms. Further, this relationship shows country-wide variation. Using the data of 336 Indian firms from 2011 to 2021, this article examines the tax avoidance and investment efficiency relationship in the Indian context. It also provides empirical evidence for the agency argument on the tax avoidance-investment efficiency relationship. Estimates using the two-step system generalized methods of moments approach show that tax avoidance in Indian firms is positively associated with investment inefficiency, and the agency problem augments this relationship. The findings have significant policy implications for policymakers and firms. JEL Codes: G30, G32, G34

Firms' potential for economic sustainability and firm value: The moderating role of blockholders

AbstractFirms that strive to innovate (i.e., firms that invest in research and development—R&D) have high potential for economic sustainability due to the possibility of generating new platforms of growth and future revenue. However, it is little understood whether financial markets incorporate (if at all) information on firms' potential for economic sustainability. After all, firms' information on R&D investments is very opaque. This poses a challenge to investors to incorporate into firm value any economic sustainability emanating from such information. We investigate whether blockholders, owners with at least a 5% shareholding in a firm, help reflect in firm value the firms' potential for economic sustainability. We find that active blockholders, rather than passive blockholders, help incorporate in firm value the potential for economic sustainability. Thus, active blockholders help mitigate agency problems in firms and help financial markets digest firms' potential for economic sustainability.

Liquidity and Corporate Governance

This paper discusses the relationship between stock market liquidity and corporate governance. Both concepts are widely investigated from different angles in the literature. It is generally agreed that they are related so that better corporate governance implies higher liquidity for shares of listed companies. However, the importance of good corporate governance for the market liquidity of the share will differ depending on the characteristics of the firm’s business. Good corporate governance will be particularly important in reducing agency problems in firms where the business is subject to a high degree of uncertainty. Proper corporate governance, in other words, matters most for firms where external assessment of the firm’s business prospects is difficult, while it is less important for value creation in firms where the business is easier to understand.

Insider Ownership and Investment Efficiency

Agency problems in firms are known to influence suboptimal capital investment decisions. Using panel data of publicly listed firms in India, we find evidence that increased insider ownership is associated with lower investment efficiency, i.e. as insider ownership increases, firms show tendency to make capital investments beyond the optimal level. However, we do not find evidence of increased insider ownership leading to underinvestment (below the optimal level of capital investment). A plausible explanation, consistent with theory, is that such insiders are making capital investments for private gain and empire-building rather than in the best interest of the firm. Additional analyses show that the presence of independent directors on the board of firms mitigates such value-destroying investments stemming from increased insider ownership.

Group-affiliated Firms and audit fees: Evidence from India

This study analyzes the role of auditors and affiliation to a business group in corporate governance of firms by examining the audit fees charged to group-affiliated and independent firms. Agency problems in firms may be mitigated by the monitoring provided by controlling investors of firms affiliated to business groups. On the other hand, concentrated ownership may also result in higher agency costs because of inefficient profit distributions, tunneling, and complicated ownership structures. Audit fees are determined by the effort expended and the risks faced by auditors. We examine the relationship between audit fees and Group-affiliation for Indian firms. We find that the audit fees paid to BigN auditors are lower for Group-affiliated firms than non-Group-affiliated firms, but audit fees paid to non-BigN auditors are significantly higher for Group-affiliated and non-Group-affiliated firms, consistent with the idea that BigN auditors recognize the role of Group-affiliation in mitigating the agency conflicts.

Agency problems in firms with an even number of directors: Evidence from China

Abstract To avoid a tie in voting, most boards have an odd number of directors. We argue that boards with an even number of directors are more likely to be weak monitors because of inefficient decision making and being captured by controlling shareholders. Consistent with this argument, we find that in China boards with an even number of directors have fewer meetings and are more likely to have board members absent from board meetings. Firms with an even number of directors have more tunnelling through intercorporate loans and related party transactions, lower financial reporting quality and higher incidence of accounting irregularities. This evidence is stronger in firms with weaker external monitoring and for directors with weaker incentives to monitor. Finally, we show that firms with an even number of directors are associated with lower market valuation of equity. Our results suggest that corporate boards with an even number of directors in emerging markets are associated with more agency problems.

The effect of government quality on corporate cash holdings

We use China as a laboratory to test the effect of government quality on cash holdings. We build on, and extend, the existing literature on government expropriation and its interaction with firm-level agency problems by proposing a financial constraint mitigation argument. We find that firms hold less cash when local government quality is high, which is not consistent with the state expropriation argument, but supports the financial constraint mitigation argument. A good government lowers the investment sensitivity to cash flows and cash sensitivity to cash flows, decreases cash holdings more significantly in private firms, and improves access to bank and trade credit financing. We also test and find support for Stulz's (2005) model on the interaction between government and firm agency problems.

Web Traffic And Firm Performance: Evidence From The MENA Region

Does the traffic generated by websites of firms signal anything to stock market participants? Does higher web-traffic translate into availability of more information and therefore lower agency problems? And if answers to above questions are in affirmative, does higher web-traffic traffic translate into better firm performance? This paper aims to answer these questions by documenting a positive relationship between the extent of web-traffic and firm performance in the MENA region during the 2010. We argue that higher web-traffic lowers the agency problems in firms by disseminating more information to stock market participants. Consequently, lower agency problems translate into better performance. Furthermore, we also show that agency reducing role of web-traffic is more pronounced in regimes where information environment is already bad. For example, our results show stronger impact of web-traffic on firm performance in civil law countries, firms with concentrated ownership, and firms with more intangible assets. All of these groups are characterized by higher agency problems. Our results, therefore, indicate that web-traffic can play a substitute for traditional governance mechanisms in the MENA region.

The effect of corporate governance and divergence between cash flow and control rights on firm performance: Evidence from Malaysia

Nowadays, separation of ownership from control in business causes the inability of shareholders to have a full control over managerial actions. In this situation, agency theory assumes an opportunistic behavior, that is, individuals want to maximize their own expected interests and are resourceful in doing so. This opportunistic behavior leads to conflict of interest between managers and shareholders on the one hand, and majority and minority shareholders on the other. From the agency theory perspective, the aim of Corporate Governance (CG) is to mitigate these agency conflicts and direct the operations to achieve an appropriate performance. Therefore, the aim of this study is to examine the relationship between CG characteristics and firm performance in Malaysian listed firms where divergence between cash flow and control rights is critical. Based on a randomly selected sample of 400 companies listed on Bursa Malaysia and applying the linear multiple regression, it is found that board independency and CEO duality have respectively positive and negative relationship with firm performance. In addition, audit quality has a significantly positive relationship with firm performance. The contribution of this study is to add a dummy interaction between audit quality and divergence between cash flow and control rights. It is found that high-quality audit firms can mitigate the agency problems in firms with divergence between cash flow and control rights.

The Effects of Government Quality on Corporate Cash Holdings

We use China as a laboratory to test the effect of government quality on cash holdings. We build on, and extend, the existing literature on government expropriation and its interaction with firm-level agency problems by proposing a financial constraint mitigation argument. Wefind that firms hold less cash when local government quality is high, which is not consistent with the state expropriation argument, but supports the financial constraint mitigation argument. A good government lowers the investment sensitivity to cash flows and cash sensitivity to cash flows, decreases cash holdings more significantly in private firms, and improves access to bankand trade credit financing. We also test and find support for Stulz’s (2005) model on theinteraction between government and firm agency problems.

Banks on Board: German and American Corporate Governance, 1870–1914

This examination of the foundations of German and American corporate governance highlights the role of money-centered banks, both as board members in large corporations and as intermediaries on the stock exchange. German banks, by acting as surrogate regulators, became institutional stabilizers, and German regulators encouraged banks to participate in corporate boards in order to overcome agency problems in firms and to control speculation. American investment banks, prior to 1914, often managed to overcome regulatory obstacles, which enabled them to wield more power over corporations than their legendary German counterparts. American banks had more opportunities to intervene in the event of panics, bankruptcies, foreign investment, and corporate consolidation. In contrast to Germany, the United States increasingly imposed regulations that circumscribed the supervisory role of banks as board members.

Blockholder Scarcity, Takeovers, and Ownership Structures

Agency problems in firms are prevalent because of a scarcity of wealthy principals with corporate govern-ance ability, whom we call specialists. We investigate how this scarce resource, agency cost-free capital, is allocated. We show that the restructuring specialists may acquire blocks only in those states of the world in which they can increase firm value the most, which corresponds to a takeover. Firms with dispersed ownership and firms with a financial intermediary as a blockholder can coexist, although they are otherwise identical. The model can explain differences in corporate ownership structures and re-structuring mechanisms across economies.

Ownership, Control and International Operation

Strategic decision-making is a very complex process. Concerning firm internationalisation, such complex process involves the strategic, tactic and technical levels in a dynamic perspective. As a matter of fact, the interaction between a firm's ownership/control distance and the formulation and implementation of an international strategy is paramount as long as the effects of such decisions are felt throughout the organisation and its range of activities to a varying degree. This issue is, then, of interest for international strategy analysis, assessment, diagnosis, revision and (re)formulation - from a micro point of view - and even for policy formulation concerning the internationalisation of firms of a given industrial sector - from a macro point of view - since specificities are determined by different ownership/control patterns that imply diverse advantages and disadvantages (e.g., bounded rationality characteristic of highly concentrated ownwership and control, agency problems in firms with hired management, coordination and ownership dilution problems in both cases). These factors have a firm-level impact on the formulation of international strategy because decision-making capacities are constrained by ownership/control and are influenced by the expectations that rise out of the project itself. Furthermore, a macro-level impact is not negligible either, because state and sector mechanisms created to promote internationalisation have to serve firms and their needs according to the characteristics of the industrial system or sub-system they belong to in order to assure the highest possible efficiency in terms of results.