Agency Costs Of Equity Research Articles

Equity Concentration, Agency Costs and Performance of Non-financial Firms Listed on the Saudi Stock Exchange (Tadawul)

This article examines the association between the equity concentration and agency costs as well as the impact of agency costs on performance of non-financial firms listed on the Saudi Stock Exchange (Tadawul). These relations are examined by using dynamic panel data and a two-step robust system estimation for the period 2010–2013. The study uses three proxy variables to measure agency costs. The results show that the equity concentration has no significant impact on agency costs, and the agency costs have no significant impact on firms’ performance. In addition, the study shows no evidence to support the agency theory in non-financial firms listed on the Saudi Stock Exchange (Tadawul). This study provides a better understanding of the association between equity concentration, agency costs and a firm’s performance.

Does a high dividend payout ratio signal proper corporate governance or high agency cost of debt?

This paper examines the relationship between dividend policy and the cost of debt in Morocco. The results show that high dividend payments reflect a low level of agency costs of equity and low information asymmetries. Consequently, creditors demand lower return for providing their capital to high dividend-paying firms. The findings reveal that creditors are less concerned with agency costs of debt. The study shows that the negative relationship between dividend payout ratios and cost of debt is more pronounced in firms with higher information asymmetries.

Creditor rights, culture and dividend payout policy

We study how creditor rights and culture interact with one another to influence corporate dividend payout policy. Where creditor rights are strong, creditors accept the status quo, which are large dividends in individualist and small dividends in collectivist traditions, respectively. Culture influences dividend payout where creditor rights are weak. In collectivist countries where group cohesion among corporate stakeholders results in perceived lower agency costs of debt and equity, creditors place few if any restrictions on dividend payout given weak creditor rights. In contrast, in individualist traditions, creditors continue to restrict dividend payouts under weak creditor rights. Our findings emphasize the importance of accounting for the interactions between creditor rights and culture in determining dividend policy.

Effects of Capital Structure and Managerial Ownership on Profitability: Experience from Bangladesh

<p>This paper aims at investigating the effects of capital structure and managerial ownership on the profitability of the Bangladeshi companies based on a strongly balanced panel data of 81 manufacturing companies listed under 10 industries in Dhaka Stock Exchange for 2002-2014. The results of Panel Corrected Standard Error (PCSE) regression model suggest that capital structure variables negatively affect ROA but positively affect ROE of the firms. Furthermore, Short term debt influences profitability of the firms more severely compared to Long term debt. On the contrary, managerial ownership positively affects profitability conforming to the Agency cost theory. It was also found that Bangladeshi firms followed aggressive financing strategies that led to an increase in their financial & bankruptcy risks to a great extent. That the financial managers should employ less leverage in the capital structure and minimize agency cost of equity in order to maximize the profitability of firms is the policy implication of this paper. EN-US style='font-size:10.0pt;font-family: "Times New Roman","serif";mso-ascii-theme-font:major-bidi;mso-fareast-font-family: 宋体;mso-hansi-theme-font:major-bidi;mso-bidi-theme-font:major-bidi;mso-ansi-language: EN-US;mso-fareast-language:ZH-CN;mso-bidi-language:AR-SA'>instead of evaluating an individual chain i.e. Service provided by Original Equipment Manufacturers to Telecom Service Providers or vice versa or from Telecom Service Providers to the End Users. Questionnaires feedback was taken from comprehensive chain of services, i.e. forward and backward chain feedback was considered. Research findings suggest that technological support would improve service delivery system and service organizations shall put special emphasize on Service Quality for achieving critical success, which would improve overall Customer Satisfaction, Customer Loyalty, Operational Performance and Firm Profitability.</p>

Bank Dividends, Agency Costs and Shareholder and Creditor Rights

Using data on listed bankes 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.

The Effects of Agency Costs and Insiders’ Shareholdings on Financing Choices

<p><span style="font-size: medium;">This paper investigates the effects of debt agency cost and equity </span><span style="font-size: medium;">agency cost of current and prior periods on the financing choices of long-term debts, seasoned equity offering, and private equity financings. It also examines the effects of the shareholdings of insiders on the association between both debt and equity agency costs and the choice of financing methods. </span></p>The findings show that both prior and current debt agency costs are positively related to seasoned equity offerings of current period, and both prior and current debt agency costs are positively related to private equity financing of current period regardless of whether the models consider the factor of insiders’ shareholdings. As for equity agency cost, the document indicate that both current and prior equity agency costs are negatively related to current seasoned equity offerings, however, only prior equity agency costs are negatively related to current seasoned equity offerings under considering shareholdings of insiders. Moreover, the shareholdings of insiders would affect the positive association between the corporate debt agency cost and seasoned equity offerings and the positive association between the corporate equity agency cost and debt financing.

Does management entrenchment explain agency costs of equity: Evidence from French firms.

The purpose of this study is to examine the effect of the management entrenchment on the agency costs of equity. We conduct tests on 120 French companies over the period 2000-2014 in order to test the impact of the main factors that can intensify the conflicts between shareholders and managers. We use three alternative measures of agency costs of equity, namely asset utilization, operating expenses and administrative expenses. According to the empirical results, the CEO age, his dual role of executive and chairman, and the discrepancy between ownership and voting rights are relevant determinants of agency conflicts between shareholders and managers. Furthermore, we find that the manager’s seniority and his ownership constitute internal governance mechanisms for the French companies.

Credibility and Multiple SEOs: What Happens When Firms Return to the Capital Market?

Using a sample of firms that conducted multiple seasoned equity offerings (SEOs) from 1995 to 2012, we examine whether firms can build credibility for subsequent SEOs by following through on their stated use of the proceeds from earlier SEOs. We find that firms that state their intention to invest these funds in projects and those that make no such statements, but do invest have relatively more positive announcement returns around subsequent SEO announcements. Our results suggest that the markets are aware of the potential agency costs of equity, have a long memory, and update their beliefs as to the likely use of funds raised by firms.

Is executive compensation a substitute governance mechanism to debt financing and leasing?

ABSTRACTThis study examines whether and how CEO equity incentives relate to financing choices (i.e., debt and leases). Using manually collected CEO compensation and lease data for a sample of large UK firms, we found evidence of a negative relationship between CEO equity incentives and firm leverage. We also found that CEO equity incentives and leases are negatively related. The results are consistent with the theory introduced in this study on the substitutability of executive compensation and firm’s debt/lease financing. Our findings represent fresh empirical evidence and renewed interpretation regarding the relationship between executive equity-based incentives and firm’s financing choices. The substitutability theory we introduced here suggests that firms with greater use of debt and/or leases will implement less equity-based compensation in mitigating the agency cost of equity.

Debt maturity and initial public offerings

We investigate the effect of initial public offerings (IPOs) on the evolution of debt maturity by tracking a sample of US firms that went public over the period 1998–2011. Our findings reveal a significant and permanent increase in debt maturity post-IPO. The short-term debt ratio drops by nearly a fifth in the first 2 years after the IPO. These findings are economically significant and robust to controlling for the endogeneity in the listing decision. However, the lengthening of the post-IPO debt maturity is only evident in small, high-growth, and highly levered firms. This finding lends greater support to asymmetric information models than theories based on the agency costs of debt. There is some support for the argument based on the agency costs of equity as the IPO effect on debt maturity is only significant for firms with a high dilution ratio. Finally, the IPO effect varies with macroeconomic conditions as the increase in debt maturity post-IPO was most pronounced during the recent financial crisis of 2007–2008.

Does Governance Efficiency Affect Equity Agency Costs? Evidence from Borsa Istanbul

In this article, we investigate whether the governance efficiency variables mitigate the costs arising from agency problems for companies listed on the Borsa Istanbul (BIST). The empirical analyses are conducted on nonfinancial firms during the 2005–11 period. Four models have been implemented for each of the agency-cost proxies, and all of them are estimated by panel data regressions with fixed effects. This study provides evidence from an emerging market about which governance variables and control variables differently reduce the extent of conflicts of interest between managers and shareholders. The findings also indicate that highly concentrated firms in Turkey are more engaged with agency problems and do not effectively control excessive perquisite consumption and facilitate asset utilization.

Debt Maturity and Initial Public Offerings (IPOs)

We investigate the effect of initial public offerings (IPOs) on the evolution of debt maturity by tracking a sample of US firms that went public over the period 1998-2011. Our findings reveal a significant and permanent increase in debt maturity post-IPO. The short-term debt ratio drops by nearly a fifth in the first two years after the IPO. These findings are economically significant and robust to controlling for the endogeneity in the listing decision. However, the lengthening of the post-IPO debt maturity is only evident in small, high-growth, and highly levered firms. This finding lends greater support to asymmetric information models than theories based on the agency costs of debt. There is some support for the argument based on the agency costs of equity as the IPO effect on debt maturity is only significant for firms with a high dilution ratio. Finally, the IPO effect varies with macroeconomic conditions as the increase in debt maturity post-IPO was most pronounced during the recent financial crisis of 2007-08.

Corporate efficiency in the UK: a stochastic frontier analysis

Purpose – Using a panel of 1,122 UK firms listed on the London Stock Exchange over the period of 1981-2009, corporate efficiencies are predicted in this paper as inverse proxies of agency cost and the agency cost hypotheses are tested. The paper aims to discuss this issue. Design/methodology/approach – Stochastic frontier analysis is used to estimate corporate efficiency of firms, but from two different perspectives. The long-run and short-run corporate efficiencies are predicted focussing on modern approach of value maximization and traditional approach of profit maximization, respectively. Findings – The estimation results reveal that, an average firm in the sample achieves 74.5 percent of its best performing peer's market value and 86.6 percent of its best performing peer's profit and both of them are highly significant in the analysis. The long-run market value efficiency supports the agency cost of outside equity and the short-run profit efficiency supports the agency cost of outside debt hypothesis. Also there is a positive rank correlation between these two efficiencies which confirms that an average firm in the UK suffers from inefficiency or agency conflicts to a certain extent, no matter whether the firm is driven by short-run or long-run growth perspectives. Research limitations/implications – The predicted broad measures of agency costs in the paper have wider implications in enhancing the understanding of the UK firms’ corporate performance especially when they operate under a relatively free and market based governance and financial system. Originality/value – The work is distinguished by the large panel of UK firms and a long period of time that is considered. Emphasizing on the empirical implications of the distinctions between short-run and long-run efficiency is also novel.

Agency Costs of Equity and Accounting Conservatism: A Real Options Approach

This paper investigates how conservative accounting system can mitigate the agency problem between the manager and shareholders of a firm, which arises from information asymmetry. In this study I assume that the firm has a privileged right to engage in an irreversible discrete project, i.e., it possess a valuable option to delay investment. Using standard real options arguments, I first show the manager tends to invest earlier than optimal, when she owns information advantage over shareholders of the firm. In other words, the firm incurs agency costs of equity because the manager tends to over-invest. I then demonstrate that the application of accounting conservatism will induce the manager to report her private information more truthfully, and thus reduce the agency costs of equity. In addition, the reduction on agency costs will be more profound when the cash-flows of the investment project are highly uncertain.

Dividend Persistence and Equity Agency Costs in Banking: Evidence from the Financial Crisis

By persisting in paying dividends during crises, banks not only weaken their liquidity and solvency positions; they also exacerbate systemic risks. However, the drivers of such persistence remain elusive. In this paper, we analyse the

Equity agency costs in payouts, pension plan manipulation and firm performance

Purpose – The purpose of this paper is to present novel empirical findings regarding the shareholder-management agency problem. Design/methodology/approach – The paper presents new evidence regarding the shareholder-management agency problem. It expands the set of factors that may cause agency problems to include both dollar value of management holdings and its fractional holdings. Findings – First, the paper finds that this problem is better explained when management fractional holdings and management absolute equity wealth are considered simultaneously than separately. Second, it provides evidence that separation of control and ownership leads management to drive profits artificially upwards by overstating the anticipated long-term rate of return on pension plans (LTROR). The paper's findings point to the LTROR as a promising novel indicator for shareholder-management agency problem. Research limitations/implications – Samples of 628 US firms during the period 1996-2005. Only 238 firms for pension plans as many firms do not have an internal pension fund. Practical implications – The paper suggests practical ways to alleviate agency problems. Social implications – The paper shows the strategic use of a change in the anticipated LTROR on pension plan assets that stems from an agency problem and affects the firm's reported net profits. The paper observes the strategic determination of LTROR in firms in which the pension funds are controlled by management. A possible social implication can be a risk for employees in firms in which the pension funds are controlled by management. Originality/value – The paper aims to enrich the current literature using a novel indicator of the agency problem: the long-term change in the anticipated LTROR on pension plan assets.

An Empirical Study of Equity Agency Costs and R&D Intensity: Evidence from Listed Companies on the ChiNext

Using a sample of companies listed on the Shenzhen ChiNext board between 2009 and 2011, this paper analyzes the effect of shareholding proportion for the controlling shareholder on the firms R&D investment intensity. I find that the relation between R&D intensity and the equity of de facto controller is U-shape. My findings support the agency conflict between majority and minority shareholders.

Credibility and Multiple SEOs: What Happens When Firms Return to the Capital Market?

Using a sample of firms that conducted multiple SEOs during 1995-2012, we examine whether firms can build credibility for subsequent SEOs by following through on their stated use of proceeds from earlier SEOs. We find that firms that previously state their intention to invest funds in projects and those that make no such statements but nevertheless make investments both have relatively more positive announcement returns around subsequent SEO announcements. Our results suggest that markets are aware of potential agency costs of equity, have a long memory, and update their beliefs as to the likely use of funds raised by firms.

The determinants of equity agency conflicts between managers and shareholders: Evidence from Australia

We analyse the determinants of equity agency costs for the top 500 Australian listed firms. Data are collected over four one-year periods (2004, 2005, 2010 and 2011) and analysed using both pooled OLS regression and two stage least squares regression within a random effects panel data model. Analysis covers the full four-year period, the pre global financial crisis (GFC) sub-period (2004 and 2005) and the post GFC sub-period (2010 and 2011). Shareholding, board characteristics and debt financing are found to have an impact on agency costs though there is evidence of some change in these relations with the onset of the GFC, particularly with respect to the impact of insider ownership and board size.

Cash dividends and investor protection in Asia

We study the importance of investor rights in payout policy determination in Asia, using a sample of up to 52,778 firm years. The listed Asian firms located in relatively high investor protection, common law countries, have a greater tendency to payout and, if they do so, they tend to pay out more. We also examine the importance of distinctive creditor and minority shareholder rights in respect to payout policy determination. In our study of a variety of payout events (decisions to pay out, to initiate or omit payout and to markedly increase or decrease payout), we show that this set of payout events is principally determined by competing creditor and minority shareholder rights, rather than managerial sought reputation related effects, to diminish the cost of capital. Our findings indicate that creditors exert significant and far reaching influence over corporate payout policy decision-making, however, the importance of the agency costs of equity predominates.