Predictions Of Agency Theory Research Articles

Avoiding Adverse Specialization in Multitasking: An Experimental Test of Agency Theory Predictions

Avoiding Adverse Specialization in Multitasking: An Experimental Test of Agency Theory Predictions

Corporate social responsibility and the likelihood of external financing

<p style="text-align:justify"><span style="font-size:16px"><span style="font-family:Times New Roman,Times,serif"><span dir="ltr" lang="EN-US"><span style="color:black">This paper empirically investigates the relation between firm performance in corporate social responsibility (CSR) and the need and likelihood of external financing to test the predictions of agency and stakeholder theories. Empirical results from Logit, Linear Probability Model, OLS and Firm fixed effects regressions indicate that CSR is negatively related to the likelihood and level of external financing. Further analysis indicates that CSR has a negative and significant effect on both net equity issued (NEI) and net debt issued (NDI), the two components of external financing. Overall, the empirical results support the predictions of agency theory.</span></span></span></span></p>

CEO Type and Firm Performance: Evidence from Nasdaq Baltic

Despite the well-established characteristics of shareholder-CEOs and professional-CEOs, previous research has yielded inconclusive findings on the actual impact of the separation of shareholding and management on firm financial performance. This study aimed to address this gap by going off the beaten path of research centered on the U.S.-listed firms and investigating 55 firms listed on the Nasdaq Baltic market in the post-Soviet countries of Estonia, Latvia, and Lithuania from 2017 to 2021. While professional-CEO-led firms displayed higher Tobin’s Q (M = 1.37) compared to shareholder-CEO-led firms (M = 1.17), and shareholder-CEO-led firms had a higher average ROE (M = 7.76%) compared to professional-CEO-led firms (M = -1.74%), independent samples t-test analysis revealed that these differences in either stock market performance (p = .250 > .05) or shareholder return (p = .193 > .05) were statistically insignificant. These findings challenge organizational life cycle theory and agency theory predictions, aligning instead with stewardship theory and upper echelons theory, suggesting that CEO characteristics, motivation, and actions, while clearly distinct for shareholder-CEOs and professional-CEOs, are not the sole determinant of financial performance in mature firms. Accordingly, shareholder-CEOs, other stockholders, and boards of directors should draw support from these findings in their considerations regarding firm leadership.

The Conservatism Principle and Asymmetric Preferences over Reporting Errors

ABSTRACT Accounting conservatism has been described as deriving from preferences for reporting errors to be in the direction of understatement rather than overstatement. We pair reporters with users (who rely on reporters’ information) in a multiperiod experiment. We posit that, under misaligned incentives that motivate aggressive reporting, users view aggressive reports as reflecting exploitative intent and expect that a norm prohibiting aggressive reporting applies. We predict that users use noisy reporting errors to gauge reporters’ norm compliance. We find that, ceteris paribus, users prefer not to be paired with reporters producing overstatement errors likely to reflect aggressive reporting relative to reporters producing understatement errors likely to reflect conservative reporting; alternatively, we find no such asymmetric preferences when the agents’ motives are aligned. The asymmetric preferences cannot be explained by agency theory predictions of payoff maximization or loss aversion. These moral preferences provide an initial condition from which conservatism can endogenously emerge. Data Availability: Data are available from the authors upon request. JEL Classifications: B52; D81; D82; M41.

Long-term compensation and risk taking: exploring the role of crisis in CEOs' behavior toward mergers and acquisitions

PurposeCorporate governance scholars have built on agency theory premises to document chief executive officers' (CEOs’) debt-based compensation, also known as inside debt, as an effective tool to control excessive risk and deter risky corporate strategies. In this study, the authors draw on behavioral agency model to put these well-established assumptions to the test in a different setting and argue for the context-specific effects of CEOs' long-term compensation.Design/methodology/approachFocusing on corporate mergers and acquisitions in a post-crisis period (2011–2017), the authors cast doubt on agency theory predictions on debt-like compensation, point to the more realistic assumptions of behavioral decision models, and call for more contingency approaches in theoretical arguments.FindingsAn analysis of more than 4000 observations reveals that neither CEOs nor shareholders react significantly to inside debt after the economy recovers. Firm risk is also influenced only marginally by long-term compensation in a normal period of time.Originality/valueWhile extant literature is rather unanimous on risk-reducing impact of inside debt, the study periods span the financial crisis of 2007. This research is the first conducted in regular times to demonstrate that previous findings are biased and heavily influenced by an exogenous shock.

Toward An Affect Based View of Principal–Agent Dynamics

Following its 40th anniversary and more than three decades after its introduction to the strategic management literature, agency theory remains the predominant theory of corporate governance. In this paper, we examine affect, an underexplored dimension in principal-agent relationships. Using the CEO-board of directors relationship as a context, we develop a theoretical lens that explains how interpersonal affect underlying relationships between CEOs and directors of boards shapes behavior in ways that deviate from traditional agency theory predictions. We discuss how the incorporation of an affective perspective advances principal-agent research by revising agency theory‘s assumptions concerning human nature and behavior and suggesting new research directions. By acknowledging a central role of affect, we connect existing behavioral approaches to organizational agency and advance our understanding of socioemotional foundations of principal-agent tensions, problems, and agency costs.

Inside Debt and Risk: Is There A Link?

The disclosure of CEOs' pension benefits and deferred compensation in 2007 provided scholars with the opportunity to test agency theory predictions on these long-term compensations, also known as inside debt. While the studies showed this form of payment as an effective tool in controlling excessive risk, they all overlapped with the financial crisis of 2007 and its aftershocks. Drawing on behavioral agency model and focusing on corporate mergers and acquisitions as a high-risk investment strategy, we demonstrate that neither CEOs nor shareholders remain sensitive to inside debt after the economy recovers. Our analysis of nearly 4000 observations in a post-crisis period (2011-2017) reveals that the previous findings are heavily influenced by the collapse of financial markets. Disproving agency theory arguments on debt-like compensation, our results point to the more realistic assumptions of behavioral decision models and call for more contingency approaches to theoretical inference. Practical implications are also discussed for designing executives’ compensation packages as a means of mitigating the next potential crises.

Managerial risk aversion and the structure of executive compensation

AbstractResearch question/issueWe examine how chief executive officers' (CEOs) innate risk aversion influences the size and structure of their compensation contracts. In so doing, we estimate managerial risk aversion based on the Big Five personality traits—openness, conscientiousness, extraversion, agreeableness, and neuroticism—inferred using IBM's Personality Insights service.Research findings/insightsWe provide evidence that executives' inherent risk aversion is related to their compensation structure. Contrary to agency theory predictions, we find that more risk‐averse CEOs receive more cash‐based and less equity‐based compensation but receive lower total compensation. This relationship is moderated by differences in firms' resource advantages.Theoretical/academic implicationsDespite the theoretical prediction that managerial risk aversion is a key factor determining the structure of executives' compensation contracts, there is limited empirical evidence on whether firms adjust the components of compensation based on CEOs' risk preferences. Our results help us better understand the interplay between CEO personality and executive compensation.Practitioner/policy implicationsThis study offers important implications for organizations in that knowledge about executives' inherent risk aversion is important and relevant for designing effective compensation contracts.

The effect of earnings management on firm performance: The moderating role of corporate governance quality

This paper investigates the relationship between earnings management and financial performance of firms in Anglophone sub-Saharan African Countries in a dynamic framework. The study shows how this relationship is moderated by aggregate disclosure and best-practice corporate governance quality metrics. The findings indicate that earnings management's performance effects persist even after controlling for dynamic endogeneity, simultaneity, and unobserved time-invariant heterogeneity inherent in the earnings management and performance relationship. Again, the results support the prediction of agency theory regarding the efficient monitoring effect of adherence to best-practice internal governance systems in constraining firms' earnings management practices and subsequently enhancing firms' performance. Moreover, the study's findings regarding the positive effect of earnings management on performance, which suggests efficiency motives behind earnings management practices in Africa, demonstrate that the African context is uniquely different from other emerging markets that report opportunistic motives. Concerning the moderating role, our study reveals that the positive effect of earnings management on the financial performance of firms tends to be stronger in the presence of corporate governance quality.

Determinants of CEO compensation: evidence from Pakistan

PurposeThe purpose of this paper is to investigate the impact of firm-specific (i.e. firm size, profitability, leverage, dividend, growth opportunities, management quality and firm age) and country-specific (i.e., gross domestic product [GDP] growth) variables on compensation/remuneration offered to chief executive officers (CEOs) working in different industries of Pakistan.Design/methodology/approachPanel data techniques, namely, pooled ordinary least squares, fixed effects and random effects methods are used to estimate the results. Moreover, Hausman test is used to choose which estimation method, either fixed effects or random effects, is better to explain the results.FindingsFirm size, profitability, leverage, growth opportunities and age are some important firm-specific factors that have mixed (i.e. positive/negative) impact on CEO compensation in different industries. Variations in results are due to industry dynamics. However, it is important to mention that three key variables, namely, dividend, management quality and GDP growth have shown consistent positive impact on CEO compensation in most of the industries. In sum, results show that firm-specific and country-specific variables have material effects on CEO compensation. Moreover, results are found consistent with the predictions of agency theory and human capital theory.Practical implicationsThe authors are sure that findings of this study provide some support to the board of directors to determine the pay slice for CEOs. Moreover, findings provide support to the regulatory authorities in formulating mechanisms to determine the compensation package for CEOs working in different industries and to improve the Code of Corporate Governance.Originality/valueTo the best of the authors’ knowledge, no empirical study in Pakistan has yet estimated the effects of firm-specific and country-specific variables on compensation offered to CEOs working in different industries. Thus, industry-wise analysis provides some new insights to the decision-makers and lays some foundation upon which a more detail analysis could be based.

Impact of Board Diversity on Agency Costs in the Context of Agency Theory Approach: Evidence From Listed Companies in Sri Lanka

Effective corporate governance leads the way towards aligning the interest between managers and shareholders. Effectiveness of practicing the corporate governance of companies in Sri Lanka is debatable topic due to the variation between standard and actual practices. This study aims to examine the influence of board diversity on agency costs of companies listed in Sri Lanka as proposed by agency theory. The sample of this research consists of all companies listed in Sri Lanka, exclusive of bank and financial institutions which are practicing unique governance practices issued by Central Bank of Sri Lanka. The final sample consists of 180 companies during the period from 2013 to 2019. This study deployed panel regression analysis to test the relationship formulated in the hypotheses by using the EViews 9 software. The results showed that the board diversity-related variables such as separate leadership structure and presence of non-executive director on companies’ board are appeared to have significant influence on agency costs. Meanwhile, board size does not have direct impact on agency costs. The findings of this study regarding board diversity and agency costs have important managerial implications, that these findings are unlikely to the prediction of agency theory and best practices. Agency theory is not applicable to these companies, since the exiting corporate governance practices increase agency costs. The potential benefits of this study led to re-think the board of directors of the companies, managers, shareholder and the policymakers to re-organise the implementation of best practices.

Resolving agency and product market views of cash holdings

The new finding of this study is product market and firm investment in organization capital (“OC”) together explain cash holdings. The study integrates agency and product market views of cash holdings, resolving conflicting findings in prior literature. Controlling for product market, high OC firms hold less cash than low OC firms. Agency theory predictions regarding cash holdings are not in conflict with a product market view of cash. Univariate tests show high OC firms operate in industries more likely to experience product market strain, have higher cash holdings, take more risk, have lower leverage, lower total shareholder payouts, and higher future growth prospects. Multivariate regressions including product market factors indicate high OC firms hold less cash. It is product market factors such as market concentration and import intensity that are positively associated with cash holdings. OC and cash holdings are positively associated with firm value. Product market stress is negatively associated with firm value. Findings are robust to alternative measures of organization capital, product market and cash holdings.

Ownership structure and corporate financial performance in an emerging market: a dynamic panel data analysis

PurposeThis study examines the impact of ownership structure on firm financial performance, for 146 manufacturing firms listed at the Pakistan Stock Exchange (PSX) for the period 2003–2012.Design/methodology/approachThe theoretical background of the present study is based on the agency theory. Ownership structure is measured by institutional shareholdings, insider shareholdings, foreign shareholders and government shareholdings, while return on assets (ROA), return on equity (ROE), market-to-book ratio (MBR) and Tobin's Q (TQ) are used as proxies of corporate financial performance. The dynamic panel generalized method of moments (GMM) method is employed to cater for the issue of endogeneity.FindingsWe find that institutional ownership exerts a significant positive impact on ROE and MBR, which suggests that institutional investors play a significant role in improving the financial performance of the sample Pakistani. Furthermore, the results reveal a significant positive relationship of insider ownership with ROA, ROE, MBR and TQ, which is consistent with the prediction of agency theory that concentration of insider ownership aligns the interest of shareholders with those of the managers and hence improves performance. A significant positive association of government shareholdings with ROA and ROE was also found. Therefore, policymakers may encourage government ownership in firms, which can help to improve corporate financial performance.Originality/valueThe present study contributes to the existing literature on ownership structure and corporate financial performance in an emerging market like Pakistan. It is worth mentioning that the institutional setup and corporate governance structure in Pakistan is yet at an evolving stage. Findings of this study may provide useful insights to corporate managers and investors about the relationship between ownership structure and financial performance of firms from the manufacturing sector in Pakistan.

Who wins the tug of war? A comparative study of the influence of board power and CEO power on CEO-TMT pay gap

Extant studies theoretically debate and empirically present inconsistent findings of the factors that influence the CEO-TMT pay gap. In this study, we extend the research of the antecedents of the CEO-TMT pay gap by directly comparing different theoretical predictions regarding the impacts of board power and CEO power on the CEO-TMT pay gap. Conducting dynamic panel analyses with GMM estimator on a sample of 2,117 firm-year observations in the S&P 500 between 2006 and 2013, we empirically test the contrasting predictions regarding the relationships among board power, CEO power, board-CEO power imbalance, and the CEO-TMT pay gap. In turn, we find that board power is negatively associated with the CEO-TMT pay gap and CEO power has the opposite effect. Moreover, the stronger board power against CEO power, the smaller the CEO-TMT pay gap becomes. Our theoretical analyses and empirical investigations contribute to the existing theoretical debate among agency theory, tournament theory, and managerial power theory regarding the determinants of the CEO-TMT pay gap. Consistent with agency theory predictions rather than tournament theory ones, our empirical results suggest that boards are conscientious about the potential negative effects of a larger CEO-TMT pay gap and therefore stronger boards usually do not rely on larger CEO-TMT pay gap to incentivize CEOs. This study also contributes to corporate governance literature by offering new aggregated proxies for board power and CEO power which reflect the multidimensional features of board-CEO relationships

Corporate communication as a governance mechanism: A content analysis of corporate public disclosures

Corporate communication efforts have mainly been viewed as a by-product of governmental regulations and board of directors’ oversight. In this paper, we examine the role of corporate communication as a stand-alone governance mechanism. We introduce a new business-related dictionary and conduct automated textual analysis of over 150,000 electronic documents filed by a sample of firms listed on the S&P/TSX Composite Index from 1999 to the end of 2014. Our findings demonstrate the governing role of corporate communication by documenting the adverse market effects of deviations from the expected level of communication. Moreover, as a governance mechanism, corporate communication shows substitution/complementary relationships with other established governance mechanisms. In addition, we find a non-linear relationship between a firm’s communication efforts and its value and risk levels. Results are robust after controlling for major corporate events (M&A, spin-offs, financial distress and bankruptcy, and significant lawsuits). These findings contribute to corporate governance literature and the understanding of agency theory predictions of communications and disclosures’ economic effects

How and Why Does Franchise Ownership Affect Human Resource Practices? Evidence from the US Hotel Industry

This study investigates the relationship between ownership form and human resource (HR) practices in a franchise system. Using data from a unique establishment-level survey of a US-based limited service hotel chain, the author examines how HR practices vary between franchisee- and company-owned hotels, and among franchisees with diverse ownership structures. Consistent with agency theory predictions of franchisee profit motives and free-riding behavior, franchisee-owned hotels are associated with lower investments in HR practices compared to company-owned hotels. The results of this study suggest that ownership structures influence HR investments.

Financial materiality in the informativeness of sustainability reporting

AbstractThis study examines whether financial materiality in environmental, social, and governance (ESG) disclosure benefits the stock market by increasing the amount of accessible and relevant firm‐specific information. Based on the value relevance of information and the principle of financial materiality, we demonstrate that disclosing material ESG information increases stock price informativeness. We conduct an automated content analysis of 150,000 electronic documents filed by firms listed on the S&P/TSX Composite Index from 1999 to the end of 2014. Our findings show that ESG disclosure is indeed value relevant for investors and that financial materiality in ESG disclosure leads to more informative stock prices. In addition, the effect of ESG disclosure on stock price informativeness differs across the ESG components, being more sensitive to the social component. This study contributes to the literature on sustainability reporting, and in particular to the ongoing discussion about whether the financial materiality of ESG issues matters. This study also deepens the understanding of agency theory predictions about the economic effects of ESG disclosure.

Financial Reporting Behaviour and Firm’s Economic Success: Malaysian Evidence

ABSTRACT The emergence of modern corporate landscape, with regard to the way firms are managed and controlled, creates a variety of financial reporting issues. Empirical results in prior studies have been inconclusive, as to whether financial reporting behaviours i.e. earnings management activities are detrimental to firms’ economic success (proxied by its future performance). Some have argued that managing earnings are intended to achieve better future performance rather than being opportunistic in nature. This study aims to empirically investigate whether managing earnings to meet earnings target has any affect on firms’ future performance in Malaysia. In extending prior work in the earnings management area, by incorporating discretionary reporting behaviour element to provide better view of Malaysian firms’ financial reporting behaviours across 2001–2015 reporting horizon, we find that real-based earnings management led to lower firm’s future performance. This supports the agency theory prediction that firms which engage in real reporting opportunistically would negatively affect their future economic performance. This, however, does not hold true for accruals earnings management. The empirical results suggest that different mechanisms of financial reporting behaviour, of either discretionary or real in nature, provide different implications on the firms’ future performance. The paper adds to the growing body of empirical knowledge in financial reporting behaviours and firms’ economic success in an emerging economy like Malaysia. Keywords: Real and Accrual Earnings Management; financial reporting behavior; firm’s future performance

OWNERSHIP STRUCTURE AND FIRM EXIT ROUTES

ABSTRACTOur study presents empirical evidence about the role of ownership structure for firm exit probability by explicitly differentiating between distinct exit routes (bankruptcy and forced liquidation, voluntary liquidation, mergers and acquisitions – M&A, and removal from the court register). Based on the population of Slovenian firms in the 2006–2012 period and using multinomial probit, our findings support the predictions of agency theory. Ownership concentration, share of the largest owner, and the difference in shares between two largest owners all decrease the likelihood of exit for all studied exit routes but M&A. The magnitude of their impact is largest for exits, in which owners play a decisive role, i.e. voluntary liquidation and removal. The link between the number of primary owners and exit likelihood is U-shaped with the lowest exit probability for firms with around two owners.

Sarbanes-Oxley, agency conflicts and the marginal value of capital expenditure

PurposeThe purpose of this paper is to examine the relationship between the strength of corporate governance and the value of firm-level investment policies following the passage of the Sarbanes–Oxley (SOX) Act of 2002 and the associated changes to the listing requirements of major stock exchanges. In particular the authors seek to examine potential changes in the market’s assessed value of capital expenditures after the passage of the SOX Act relative to before.Design/methodology/approachThe authors employ a difference-in-difference methodology, centred on the year of the passage of the SOX Act to test for the role of governance on the marginal value of capital expenditures. Excess stock returns are calculated by subtracting Fama and French (1993) size and book-to-market portfolio value-weighted returns from the firms’ annual stock returns. Each firm is grouped into one of 25 size and book-to-market portfolios for each year in the sample, with size and the book-to-market ratio proxying for sensitivity to common risk factors in stock returns (Fama and French, 1993).FindingsThe authors find that markets responded to the change in governance brought about by the new regulation by altering the value of firm-level capital expenditures in a way that is generally consistent with predictions of agency theory. While the overall findings imply a reduction in agency conflicts post-SOX, there is some evidence that certain firms may have suffered excessive costs of compliance, while still others saw managers become excessively risk averse.Research limitations/implicationsThe study has implications related to the efficacy of legislation. Cross-sectional variation in the effect of SOX on the marginal value of capital expenditures suggests that one-size-fits-all legislative approach can have both expected as well as unintended consequences. The study limits its analysis to examining the impact of three significant provisions of the Act. While, the value implications of the Act are largely captured by the selected three, a more comprehensive study could expand on the set of provisions studies to obtain a more granular level impact.Practical implicationsThis research should add to the growing body of the literature examining the effect of SOX on firms’ real activities and decisions, as well as contribute to the debate on whether the Act was beneficial or costly to firms. With particular reference to the impact of capital expenditure on firm value, the research contributes to the sparse literature examining the contribution of capital expenditures to firm value and the role that agency conflicts play in this relationship. Additionally, this research adds to the growing body of the literature that examines the costs and benefits of the sweeping new regulations brought on by the adoption of SOX.Social implicationsGiven the importance of investment policy for economic productivity and growth, the insights provided by findings in this research should benefit lawmakers both within the USA as well as in countries where corporate misconduct and fraud is a concern.Originality/valueThis is the first study that examines the impact of the SOX Act on the way capital markets value firm-level investment in capital expenditures. Since use of corporate resources by managers is fraught with agency conflicts, the role of SOX in potentially alleviating this conflict as revealed by the tests in this study are very valuable.