Agency Costs Of Equity Research Articles

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

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

How does excess cash affect corporate financial performance?

PurposeThis article analyzes the moderating role of investment opportunities, business risk and agency costs in shaping the nexus between excess cash and corporate performance.Design/methodology/approachThis research uses dynamic regression models (two-step system generalized method of moments) to analyze the data related to 200 Turkish companies listed on Borsa Istanbul (BIST) for the years between 2009 and 2020.FindingsThe findings indicate that when excess cash increases, the financial performance deteriorates only for firms with lower investments compared to firms with more investments. In addition, investment contributes to better financial performance for firms that hold cash surplus, whereas the influence of investment is insignificant for firms that have insufficient cash. Agency costs of equity exacerbate the adverse impact of excess cash on financial performance while agency costs of debt mitigate this effect. Excess cash reduces the financial performance of highly leveraged firms. However, this impact becomes insignificant when debt ratio decreases. The findings also show that investment has more significant role than business risk in building the precautionary motive to hold cash.Research limitations/implicationsThe findings of this article are limited to the Turkish market. Future research is still needed in other emerging markets to compare the results and reveal more about the effect of excess cash on firm performance, and how other factors can change this effect.Practical implicationsThe findings verify the increased significance of excess cash in the presence of investment opportunities and difficulties in accessing external funds. Nevertheless, the role of the equity related agency problem in reducing the benefits of cash surplus confirms the necessity of policies that support corporate governance, especially in emerging markets.Originality/valueThis article, according to the knowledge of author, is the first to examine the role of agency costs associated with debt and equity, and the compound effect of investment opportunities and business risk on the nexus between excess internal funds and corporate financial performance in emerging markets.

Do agency costs and business risk affect the corporate sustainability–financial performance relationship?

PurposeThe aim of this research is to examine the effect of corporate sustainability performance on financial performance and the role of agency costs and business risk in determining this effect.Design/methodology/approachThis study uses the data of 83 non-financial Turkish firms listed on Istanbul Stock Exchange during the period 2014–2021. Two-step system GMM models are applied to examine the study’s hypotheses.FindingsThe results indicate a positive effect of corporate sustainability performance on financial performance, and that this effect is significant only for firms that are more likely to suffer agency costs of equity, firms with R&D expenditures and firms with lower business risk.Practical implicationsThe results of this study confirm the importance of regulations introduced by regulators to support the sustainability initiatives for firms that have less ability to access funds required for their investments. In addition, the findings provide important insight into the role of the persistence of corporate sustainability performance in enhancing financial performance through mitigating managers' opportunistic behavior.Originality/valueTo the author’s knowledge, this research is one of few that examine the effect of agency costs and business risk on the corporate sustainability–financial performance relationship in emerging markets.

Local institutional investors and debt maturity

We examine the relation between the geographic proximity of institutional investors and debt maturity. We hypothesize and find that firms with more or closer local institutional investors have shorter maturity debt. Analyses based on new debt issues and using SOX as a natural experiment and firm headquarter relocations as exogenous shocks indicate a causal effect of local institutional monitoring on debt maturity. Tests of the underlying mechanism suggest that firms monitored by local institutional investors choose shorter maturity debt to reduce debt and equity agency costs. The results demonstrate that local institutional investors affect firms’ debt maturity choices.

Science Accounting Agency Theory Review from the Perspective of Javanese Cultural Values (Study on BMT WM)

The research method used in this study can be classified in interpretive paradigm, as a paradigm that emphasizes language role,interpretation, and comprehension in social science. The technigue of data analysis employed is HANACARAKA, reflecting that human represents the image of God who naturally has creative force, sense, and wish: which are an entity in the sense of the existence of the universe, God and human could not be separated each other. The result of this study shows that Javanese culture contains a Superior value that is religious nuance, where power and responsibility delegating in Javanese culture is a manifestation of human as the God's Subordinate on earth. With the presence of trustfulness metaphor in Organization could decrease agency cost (agency cost of equity) because the form of responsibility other than to the principal is to God as well, but 'Conversely if the agent cannot be trusted then the agency cost (agency cost Of equity) will be higher because the agents do not have responsibility to the principal or God, but that is only for maximizing their own utilities. Therefore, in Javanese culture, agent and principal responsibilities are not limited to the contract dealt, but responsibility to God as well

Agency costs, capital structure and corporate performance

Purpose: The aim of this study is, first to describe and explore equity agency costs; second, to explore the impact of capital structure on equity agency costs; and finally, to examine the impact of agency costs on the performance of listed companies. Methodology: Panel data regression has been used for research data analysis. Results: The results of the work show that equity to capital and long-term debt to capital variables have a positive and significant impact on the agency costs of listed companies in the Republic of Croatia. The study indicates that long-term debt to capital variable has a negative and significant impact on the agency costs of listed companies in Slovenia and the Czech Republic. Furthermore, we find evidence to suggest that changes in agency costs have little or no effect on the performance of listed companies in Croatia, Slovenia and the Czech Republic. The findings suggest that the capital structure decisions affect the agency costs of listed companies and the agency costs may affect corporate performance. Conclusion: This study makes a number of contributions to the agency costs literature. It presents the first study of agency costs of listed companies in Croatia, Slovenia and the Czech Republic that uses panel data, a technique that enables us to isolate both cross section and time series effects. The present paper can help managers to better understand equity agency costs and their effects on corporate performance.

The real effects of financial reporting quality: Agency costs of overvalue equity in takeover market

Does pre-existing financial reporting quality play a role in mitigating market-driven takeover bids and enhancing investment efficiency? An exogenous buying pressure from mutual funds with extreme capital inflows affords us a quasi-experimental setting for testing the real effects of acquirers’ financial reporting quality. We find that financial reporting quality disciplines acquiring firm managers at the front-end of the acquisition process and averts value-destroying takeover stock bids. Our findings suggest that managers discipline themselves and offer takeover bids less frequently as a reaction to equity overvaluation when high-quality financial reporting facilitates an effective board oversight and managers rationally anticipate that the board will reject their market-driven stock bids. If managers inflate earnings proactively to prop up the stock price for their upcoming M&As, we will also observe an inverse relation between financial reporting quality and the likelihood of M&As. Our identification strategy on exogenous equity overvaluation helps in ruling out the reverse causality explanation of our findings. We contribute to the literature by investigating the effects of transparent financial reporting on mitigating managers’ sub-optimal investment decisions and unraveling the mechanisms underlying the real effects of financial reporting quality. Our falsification test result suggests the presence of tensions in our hypothesis.

The Effect of Debt Financing on Firm Value: A Panel Data Approach

The study examines the effect of debt financing on firm value of listed Nigerian companies using panel data analysis for the period 2008 to 2017. The population of the study consists of 300 firmyear observations. The data for this study were sourced from the annual accounts and reports of the companies within the period of the study. Using EV/EBITDA ratio as a proxy for firm value, the study found an insignificant effect of the short-term debt to total assets ratio on firm value. But, the ratio of long-term debt to total assets, total debt to total assets and total debt to total equity have positive effect on firm value. While board size and firm growth have no significant effect on firm value, firm size was found to have a negative effect on firm value. Thus, the study concluded that capital structure influences the firm value of listed firms in Nigeria. The study recommends making use of more debt to reduce agency costs of equity, minimize the problem of information asymmetry and increases investors' confidence to boost firm value.

Environmental Disclosure: Determinants and Effects on Financial Performance? An Empirical Evidence from Turkey

This article investigates the determinants of environmental disclosure and its effect on financial performance. Using a sample of 66 firms listed on Istanbul Stock Exchange during the period 2014-2018, we find that highly leveraged and larger firms, and firms with higher equity agency costs are more likely to disclose environmental information. However, the results indicated that profitability, industry type, information asymmetry, investment opportunities and business risk do not affect the probability that the firm will disclose environmental information. Finally, we find a weak evidence that environmental disclosure affects the financial performance of Turkish firms.

Investor Protection and the Substitution Effect of Corporate Governance and Product Market Competition on Firm Value

International research has firmly established that a substitute relationship exists between corporate governance and product market competition on firm value. In this study, I reexamine this substitution effect in an international setting, allowing the relation to vary with investor protection. As hypothesized, I find that investors place a higher value on the substitution effect of corporate governance and product market competition in countries where the legal and regulatory mechanisms to protect investors are weak. This finding suggests that country-level investor protection has a moderating role in affecting the substitution between product market competition and corporate governance on firm value. These results, which are robust to several sensitivity tests and alternative specifications, are consistent with an equity agency cost benefit, resulting from product market competition and corporate governance, which is valued more by investors where investor protection is weak.

Ownership structure and demand for independent directors: evidence from an emerging market

PurposeIn this study, we examine how ownership structure affects the use of independent directors in Vietnam – an emerging stock market.Design/methodology/approachWe develop logit and tobit regression models to investigate the effects of ownership structure on the propensity to use independent directors and the number of independent directors on the board, respectively. Insider ownership and the use of independent directors are proposed to have a non-linear relationship.FindingsWith a sample of 1,318 observations collected from 192 listed firms over the period from 2008 to 2017, we find that insider ownership and independent director appointment have a U-shaped relationship. It is positive when insiders hold a small proportion of shares, and turns out to be negative when insiders hold a large percentage of shares. In addition, both state ownership and foreign ownership are negatively related to firm decisions of appointing independent directors.Practical implicationsOur findings imply that minority shareholders should have appropriate actions to reduce agency costs and protect their own interests. In addition, policymakers should improve the effectiveness of corporate governance legislation to increase the presence of independent directors in order to protect minority shareholders. Moreover, government agencies also need to increase the number of independent directors in state-controlled firms as a means to improve their corporate governance. Foreign investors may be a substitute for independent directors; therefore, firms without independent directors are able to improve their corporate governance by attracting foreign investors.Originality/valueWhile the extant literature shows that independent directors can help firms decrease agency costs of equity in financial decisions and performance, there are relatively few studies investigating corporate decisions to use independent directors. This paper contributes to the literature of corporate governance mechanisms through independent directors in emerging markets.

Corruption, agency costs and dividend policy: International evidence

In this paper, we argue that corruption is likely to increase agency costs of equity, hence shareholders have higher incentives to control managers. When corruption is higher, firm managers need to use firm resources to make unofficial payments and they tend to take this opportunity to expropriate shareholders. Consequently, shareholders recognizing this risk need to force managers to pay more dividends in order to mitigate the agency problem. This paper examines the effects of corruption on dividend decisions in the light of agency theory. With a sample of 205,316 observations from 47 countries, we find that corruption is positively related to both the decision to pay dividends and payout ratio. Moreover, this relationship is stronger under strong creditor protection.

Does CEO inside debt compensation benefit both shareholders and debtholders?

We examine whether the proportion of CEO inside debt holdings (pension and deferred compensation) to stock holdings benefit both shareholders and debtholders by relating CEO inside debt to a firm’s dividend payout policies. Based on the positive association of CEO inside debt and the propensity and the size of the dividend payout, we find that firms paying their CEOs with large inside debt present the lower cost of debt and default risk, and these benefits transfer to better firm performance and valuation. Moreover, we find that CEO inside debt is related to superior firm performance only in dividend-paying firms. Dividends tend to increase when firms with high agency costs of equity use inside debt. We conclude that dividends serve as a channel through which CEO inside debt compensation mitigates both agency costs of debt and agency costs of equity.

Agency Cost of Equity and Growth Rate in Relation to Returns on Capital Employed and High and Low Leveraged Firms in Nigeria

This study empirically examined the theoretical predictions of agency, trade-off and pecking order theories of leverage in relation to agency cost of equity and growth rate using secondary data derived from census sampling of manufacturing, financial services (banking and insurance) firms quoted on the Nigeria Stock Exchange for the period 2013-2017. Using the same sample, the study also sought to determine the effect of agency cost of equity and growth rate on return on capital employed of high and low leverage firms. Hausman test was applied in the selection of appropriate regression model using E-Views for data analysis. Results confirm the negative relation of agency cost of equity and growth rate to leverage as predicted by agency and trade-off theories. The result also confirmed that highly profitable firms prefer internal financing to debt thus supporting the pecking order theory. Also, high leverage firms were found to post higher returns on capital employed when compared to low leverage firms implying that leverage enhances profitability. It was found that the direction of the sign of the relations of leverage and performance is swayed by the dominating subsample between high and low leveraged firms. We recommend judicious mix of equity and debt to enhance returns on investment and that regulators overhaul their monitoring mechanisms to isolate early warning signs of bankruptcy risks and earnings management.

Research on equity adjustment, agency costs and commercial bank performance: experimental evidence from China

ABSTRACTThis article studies the impact of options to adjust the performance of commercial banks from agency costs. In the shareholding structure of the adjustment process, considering changes in agency costs, only in agency costs no more than the commercial banks when new results, the company will have to adjust agent the cost of power stealth measure more just by reflecting the size of the incremental results. In addition, equity restructuring costs are the basis of agency governance and ownership structure has an important impact on agency costs. Through a few selected China 14 listed commercial banks’ 2007–2012 data, we show that the impact of performance of commercial banks on the proportion of the company’s largest shareholders is generally more significant; however, the impact of equity restriction on commercial banks was not as significant, as seen from the application of balanced panel data model analysis and the test results. However, the agency costs of commercial bank performance were significant also in a general state, indicating that equity adjustment activities of commercial banks’ cost perspective agency under the commercial bank performance significant changes are not large.

Investment and financing choices by time-inconsistent managers

This paper provides an analytically tractable continuous-time model in which a time-inconsistent manager can divert part of the firm’s cash flows as private benefits at the expense of outside shareholders. We endogenously determine the investment scale, investment threshold, optimal coupon and default threshold under managerial discretion. We demonstrate that time-inconsistent managers each have a trade-off between the timing and scale of investment.Among a number of important implications, by exploring agency costs of equity as deviations from the investment and financing policies that maximize equity value, our analysis reveals that a certain degree of time inconsistency in managerial preferences decreases the agency costs of equity. We also find that a naive manager more severely distorts the investment and financing policies than does a sophisticated manager, which leads to higher agency costs of equity. Finally, we document that the impacts of corporate governance variables, such as the managers’ property parameter and/or the level of managers’ ownership, depend on the managers’ beliefs regarding their future time-inconsistent behavior; this prediction provides novel empirical tests.

Bank dividends, agency costs and shareholder and creditor rights

Using data on listed banks in 51 countries, we analyze whether banks' dividend payouts are influenced by the relative strengths of the agency conflicts faced by their shareholders and creditors. We show that dividend policy depends on the relative strengths of these agency conflicts, but with a more decisive role played by the agency cost of equity than the one of debt, in contrast to results found in the literature on non-financial firms. We then further investigate whether those relationships are shaped by differences in funding structure, levels of capitalization and capital stringency, and potential differences in external corporate governance mechanisms.

Equity Issuances and Agency Costs: The Telling Story of Shareholder Approval Around the World

Mandatory shareholder approval of equity issuances varies across and within countries. When shareholders approve issuances, average announcement returns are positive. When managers issue stock without shareholder approval, returns are negative and 4% lower. The closer the vote is to the issuance or the greater is the required plurality, the higher are the returns for public offers, rights offers, and private placements. When shareholder approval is required, rights offers predominate. When managers may issue stock without shareholder approval, public offers predominate. These findings suggest that agency problems affect equity issuances and challenge existing adverse-selection, market timing, and signaling explanations.

The High Agency Costs of Overvalued Equity in an Emerging Market: Evidence from the Growth Enterprise Market (GEM) in China

Restriction on the access to the public equity market and non-market based selection of public listing create overvaluation and distort managerial incentives in the public listed companies in the Chinese stock market. Using the sample of newly listed firms in the Growth Enterprise Market (GEM), this paper documents evidence on the high agency costs of overvalued equity. We show that newly listed firms experience exodus of top executives shortly after public listing, and the executives time their resignations in order to “cash out” their stock holdings. Firms with greater overvaluation and lower profitability are more likely to experience executive resignation. Consistent with Jensen (2005), we find that managerial actions resulting from systemic equity overvaluation can be destructive: market reactions to executive resignation are negative and firms that experience executive exodus perform poorly. The results suggest that high valuation of public companies resulting from tight control of public equity market entry helps to create wealth for the corporate insiders rather than to create successful enterprises.

Equity Concentration, Agency Costs and Firm's Performance of Banks Listed on the Saudi Stock Market

This paper examines the impact of equity concentration on agency costs as well as the impact of the agency costs on the performance of banks listed on the Saudi Stock Market. The relation is inspected using dynamic panel data two-steps robust system estimation for the period 2010-2013. The results show that the equity concentration has no significant effect on agency costs and agency costs has no significant effects on banks performance. The study finds no evidence to support the agency theory in banks listed on the Saudi Stock Market.