Higher Agency Costs Research Articles

Digital Transformation and Management Earnings Forecast

This paper conducts an empirical examination using listed companies on China's Shanghai and Shenzhen A-share markets from 2010 to 2020. The findings indicate that digital transformation has a significant positive effect on the quality of management's earnings forecast. Mechanism analysis reveals that this effect is more pronounced in companies with lower internal control indices, higher levels of corporate governance, and higher agency costs. Digital transformation enhances the quality of corporate information disclosure and mitigates information asymmetry, further improving management's earnings forecast level. Through heterogeneity analysis, further research finds that companies lacking a technical background among senior executives, those in less competitive industries, those with poor growth, and non-state-owned enterprises, experience a more significant positive impact on the quality of management earnings forecasts from digital transformation. The conclusions provide new evidence for continuing to advance digital transformation and elucidate the benign cycle mechanism between the capital market and the national economy. This study also proposes new perspectives for the regulation of predictive information disclosure by enterprises.

Corporate social initiatives and wealth creation for firms-an empirical examination

Purpose This study aims to examine whether social initiatives adopted by firms lead to improved financial performance. The authors analyse the impact of different elements of social initiatives on wealth creation for firms in terms of operating and market performance. Design/methodology/approach The study is based on the social initiative scores of over 4,500 firms collected from Thomson Reuters' ESG database. The study uses two-stage least squares (2SLS) to analyse the relationship between social initiatives and firm performance. Findings Profitable, mature, capital intensive and firms with high sales growth rate tend to invest more in social initiatives. Firms with high agency costs invest in social initiatives for workforce efficiency, maintaining human rights and product responsibility. The study documents evidence that social investments are value creating mechanism for firms which leads to improved financial performance in terms of operating and stock market performance. Firms with high dividend intensity invest in social initiatives for workforce welfare and human rights initiatives. Investment in employee well-being and community initiatives results in intangible benefits such as improved stock market valuation. Practical implications The research model has not considered the impact of intervening variables to understand the relationship between corporate social performance and corporate financial performance. Social implications Firms ought to recognize that social investment is beneficial in terms of value creation of firms as stock market perceive such investments favourably. Firms must focus more on community development initiatives and workforce initiatives for the value creation of firms compared to investments directed towards human rights initiatives and product responsibility initiatives. Originality/value This study focusses exclusively on the social dimension of the CSR activities. The authors examine the impact of social welfare scores on firm performance by analysing the valuation effects on scores representing workforce, human rights, community and product responsibility. Moreover, the paper also examines the impact of a new dimension of product responsibility on firm performance. They also focus on both aspects of financial performance in terms of operating performance (proxied by ROE) and the joint impact of both operating and market performance (proxied by Tobin’s Q). This paper contributes to the research on the linkage of social performance to financial performance by observing that firms with high agency cost characteristics tend to invest in social initiatives for work force efficiency, maintaining human rights and product responsibility.

Does digital transformation increase corporate violations?

AbstractThis study examines whether digital transformation influences corporate violations in China. Using data from Chinese A‐share listed companies from 2007 to 2020, this paper finds that digital transformation increases the incidence of corporate violations. The results remain robust through endogeneity checks, the use of alternative measurements for digital transformation and corporate violations, and subsample analyses. Cross‐sectional analyses suggest that the impact of digital transformation on corporate violations is more salient in non‐state‐owned enterprises, firms with lower institutional investors shareholding ratios, and firms with higher agency costs. Mechanism analyses indicate that digital transformation leads to corporate violations by increasing operational complexity and affecting information quality. Additional tests reveal that effective corporate governance helps reduce the occurrence of corporate violations resulting from digital transformation. This research deepens our understanding of the economic implications of corporate digital transformation and provides valuable insights for businesses undergoing this process.

Institutional investor association and stock price crash risk: Evidence from China

This study investigates the relationship between institutional investor association and stock price crash risk, using data from all listed non-financial sector companies in the Chinese capital market. The findings indicate a significant positive correlation between institutional investor association and stock price crash risk. Moreover, property rights and agency costs play significant moderating roles in this relationship. Specifically, the impact of institutional investors on stock price crash risk is more pronounced in non-state-owned enterprises (non-SOEs) than in state-owned enterprises (SOEs). Furthermore, this impact is more pronounced in firms with high agency costs and prominent agency problems compared to firms with low agency costs. This research contributes to financial regulators being able to identify better and prevent stock price crashes, ensuring the stability of investors' returns from their invested enterprises.

Board diversity and corporate investment efficiency in emerging markets: an explanation based on principal-agent theory and resource dependence theory

ABSTRACT Using a sample of Chinese listed enterprises over the 2010–2020 period, this study examines and empirically tests the impact of board diversity on inefficient investment. Drawing on principal-agent theory and resource dependence theory, the analysis is conducted within a comprehensive framework. The study provides evidence that board diversity plays a crucial role in mitigating inefficient investment in enterprises by effectively restraining both overinvestment and underinvestment. Mechanism tests indicate that under conditions of high agency costs and high financing constraints, board diversity exerts a stronger inhibitory effect on inefficient investment. Cross-sectional tests show that the impact of board diversity on inefficient investment varies under different ownership properties, firm sizes and levels of marketization. By comprehensively considering multiple characteristics of board diversity, this research fills the research gap and expands the perspectives on inefficient investment in enterprises. It provides valuable insights for shareholders and enterprises on effectively structuring their boards of directors.

Local gambling attitudes and firms' financing strategies: New insights from the geographic structure in China

This study examines the effect of local gambling attitudes on firms' financing strategies, using the number of lottery sales stations as a proxy for the strength of these attitudes. We find evidence suggesting that firms headquartered in cities with a stronger gambling attitude tend to have more leverage than firms headquartered elsewhere. Furthermore, the effect of local gambling attitudes on firms' leverage is more pronounced among firms that have higher agency costs or exist in a more opaque information environment. Finally, a strong local gambling attitude triggers local firms to overinvest, resulting in reduced overall efficiency and increased risks of bond defaults and stock price crashes. Our findings suggest that a strong local gambling attitude may encourage firms to adopt aggressive financing strategies and lower their resource allocation efficiency.

Data assets and corporate sustainable development: evidence from ESG in China

This paper studies the impact of data assets generated inside firms on their Environmental, Social, and Governance (ESG) performance. Using a sample of listed firms in China from 2010 to 2020, we find that firms that use data assets have better ESG performance. Further analyses show that data assets improve ESG performance by enhancing operational capacity and improving monitoring. Furthermore, the impact of data assets on ESG performance is more pronounced for firms with lower asset turnover rates, weaker market power, and higher agency costs, and in scenarios where mandatory ESG disclosure is absent and CEOs have IT-related backgrounds. This paper enriches the literature by shedding light on the role of data assets in sustainable development and corporate social value creation and has practical implications for data governance in the digital era.

Higher agency costs in smaller firms? The role of size and reporting requirements in agency conflicts

Higher agency costs in smaller firms? The role of size and reporting requirements in agency conflicts

Can digital transformation reduce corporate illegality?

AbstractThe advent of the digital economy has ushered in unprecedented opportunities for corporate development. Utilizing a comprehensive data set comprising Chinese listed companies spanning the period 2011–2020, this study empirically examines the impact of digital transformation on corporate illegality. The findings reveal a significant reduction in corporate illegality attributable to digital transformation. This empirical result retains its significance even when subjected to a battery of robustness tests. In terms of the underlying mechanisms, this paper conjecture that digital transformation reduces the internal and external information asymmetry, thereby curbing corporate illegality. Further heterogeneous analysis shows that digital transformation is more effective among corporates with higher agency cost (state‐owned or large corporates) or corporates located in regions with lower degree of marketization level. These heterogeneous effects provide supportive evidence to the above conjecture. The implications of this study extend the boundaries of digital transformation research and furnish novel and actionable insights into the prevention of corporate illegality.

The Effect of Corporate Governance on the Degree of Agency Cost in the Korean Market

This study examines the relationship between corporate governance (CG) and agency costs using Korean market data, particularly for chaebol firms. The final sample includes 660 firm-year observations between 2016 and 2020 for Korean non-financial firms listed on the Korean Composite Stock Price Index (KOSPI). This study employs an ordinary least-squares panel data regression model using two proxies for agency costs, namely, asset utilization ratio and operating expense ratio, and six CG individual metrics as independent variables (CG score, protection of shareholder rights, board structure, disclosure, audit organization, and managerial discretion and error management). We find that firms with high CG experience lower agency costs than those with low CG. Moreover, our evidence suggests that firms can decrease agency costs by improving the quality of CG. The results of our regression model also support the idea that CG is effective in reducing agency costs for chaebol firms but not for non-chaebol firms. Finally, our findings suggest that the implementation of effective CG mechanisms in firms might improve managerial behavior through better decision-making to maximize the value of firms.

ESG, ESG rating divergence and earnings management: Evidence from China

AbstractThe existing studies on the relationship between ESG and earnings management provide mixed evidence and ignore ESG rating divergence. Using a sample of Chinese listed firms from 2009 to 2021, we examine the effect of ESG performance on earnings management under different levels of ESG rating divergence. The results reveal a negative association between ESG performance and earnings management. Meanwhile, among firms with high (low) ESG rating divergence, our results show that the degree of earnings management rises (falls) when the firms engage in ESG practices. Our findings are robust to alternative variable definitions and the Heckman two‐stage selection model. In addition, we exclude alternative explanations and consider the effect of greenwashing. Cross‐sectional analyses show that the moderating effect of ESG rating divergence is significant only among firms with greater CEO power and higher agency costs, suggesting that agency problems are the mechanism by which ESG rating divergence positively moderates the relationship between ESG performance and earnings management. This study advances the existing research on ESG and earnings quality by presenting new empirical evidence and revisits ESG rating divergence through the lens of agency theory, revealing that management could use ESG for opportunistic behavior in the presence of ESG rating divergence. Our study shows that the divergence in ESG ratings can affect the economic consequences of firms' ESG practices, offering insights for future research on ESG and ESG rating divergence and for regulators to improve the regulation of ESG disclosure and rating.

The impact of the organisational structure of tax authorities on tax and accounting fraud

AbstractUsing tax centralisation reform enacted to eliminate decentralised tax authorities, we find firms have lower probabilities of tax and accounting fraud since its implementation. Our analysis shows the negative impact of the reform on tax and accounting fraud becomes stronger among firms with weaker tax enforcement, indicating that the reform plays a corporate governance role through strengthening tax enforcement. Additionally, we find this effect is stronger when firm‐level governance is weaker and stronger in firms with higher agency costs. Finally, the reform effect is weaker among non‐state‐owned enterprises with political connections to the central government.

Do suppliers value clients’ ESG profiles? Evidence from Chinese firms

We investigate whether suppliers value their clients' ESG profiles in China, the largest emerging market featuring low ESG awareness and severe agency problems. We find a robust and negative impact of Chinese firms' ESG scores on their access to trade credit. The 2SLS regression results based on the instrumental variable indicate that the impact is casual. Additionally, the impact is more pronounced for firms with higher agency costs, greater information asymmetry, worse financial performance, and larger ex-ante default risk. These results suggest that suppliers in China view clients' ESG engagement as costly investments caused by agency problems. Finally, we highlight the economic importance of ESG's negative impact on trade credit by showing that trade credit access helps Chinese firms decrease debt costs, increase trade credit provision to downstream firms, and promote R&D inputs.

Employment protection and environmental corporate social responsibility: Evidence from China

The paper examines the influence of employment protection on environmental corporate social responsibility (CSR). Our findings demonstrate that employment protection has a negative effect on environmental CSR and green innovation, particularly for financially constrained firms and those with higher agency costs, providing support for the crowding-out hypothesis. Mechanism tests reveal that employment protection reduces operational flexibility and increases the risk of default for firms. Lastly, employment protection promotes the disclosure of CSR information. These findings indicate that CSR may be influenced by agency issues, and increased employment protection leads firms to reduce unnecessary CSR efforts while focusing on cost-effective CSR information disclosure.

Margin trading and value relevance of earnings: Evidence from China

Information asymmetry and accounting information effectiveness are important issues in the capital market. Based on a sample of China's A-share listed companies from 2007 to 2021, this paper studies the impact of China's margin trading and short-selling policy on the value relevance of earnings and the unerlying mechanisms. We find that, compared with companies that are not included in margin trading and short selling lists, the earnings value relevance of listed companies increases significantly after allowing for short selling. In addition, margin trading and short selling improve the value relevance of earnings more significantly for firms with higher agency costs and firms with lower information transparency.

Australian board composition and performance: Meta-analysis and implications for governance research

This paper aims to inform the ongoing emphasis on board structure (Yu, 2023) by reconciling the Australian empirical evidence on firm performance-board structure links. While international findings are instructional, differences between governance systems across nations (Alabdullah et al., 2022; Outa & Kutubi, 2021) highlight the importance of understanding the salient nature of the Australian context compared to the UK and US (e.g., fewer listed companies with lower levels of institutional shareholding, higher agency costs and higher compliance to the prescribed governance practices. Meta-analysis was employed to reach an overall Pearson correlation for the association between firm performance and four board composition characteristics (i.e., board independence, CEO duality, board size, and female ratio on boards). The meta-analysis employed includes all empirical studies that used Australian data to investigate firm performance-board structure links. This research also provides guidance on improved theorizing, measurement, and modelling for boards’ research. The results indicate that the correlation between each board’s independence, CEO duality, and financial performance is almost zero. Moreover, board size and female ratio on board have a small positive correlation with financial performance. This paper highlights the importance of considering a specific theory and evidence before employing intermediary variables as controls.

Digitalization and corporate investment efficiency: Evidence from China

We study whether digitalization improves investment efficiency using a sample of 3056 listed enterprises in China from 2007 to 2020. We adopt textual analysis to measure corporate digitalization, and preliminary tests verify the validity of our text-based indicators of digitalization. Our baseline results suggest that companies embracing digitalization exhibit lower instances of both underinvestment and overinvestment. We verify the robustness of our findings using diverse methods, including the Instrumental Variable (IV) method, Difference-in-Differences (DID) method, placebo test, and Propensity Score Matching (PSM) method. Cross-sectional analysis demonstrates an asymmetrical impact of digitalization on investment efficiency. Corporate digitalization is more effective in reducing underinvestment for small enterprises, non-state-owned enterprises, and enterprises in cities with low fiscal constraints. Enterprises with high agency costs, as well as manufacturers specializing in consumer products, derive greater benefits from a reduction in overinvestment. Mechanism analysis confirms that corporate digitalization can mitigate overinvestment by correcting managerial expectations and agency behaviors. Simultaneously, it alleviates underinvestment by diminishing the financing frictions of corporations. Our findings offer a novel perspective on how digitalization can endow companies with competitive advantages.

Striving for sustainable development: Green financial policy, institutional investors, and corporate ESG performance

AbstractEnvironmental, social, and governance (ESG) practices play an increasingly important role in achieving sustainable development goals. Drawing on institutional theory, this paper empirically explores whether and how green financial policy affects corporate ESG performance. Taking China's pilot policy for green finance reform and innovation (GFP) as a quasi‐natural experiment, we employ the difference‐in‐differences model to investigate the causal relationship between green financial policy and corporate ESG performance. We find that the GFP significantly improves corporate ESG performance. The results are robust to a series of checks such as parallel trend examination, placebo test, mitigation of omitted variable bias, alternative variables, and the exclusion of contemporaneous policies. The heterogeneity analysis shows that the positive impact of GFP on corporate ESG performance is more pronounced for firms with tighter financial constraints, higher agency costs, and more external pressures. On this basis, we further document that the positive impact of GFP on corporate ESG performance is more pronounced for investee firms with more institutional ownership. The above findings indicate that the formal institution of government‐led green financial policy can positively affect corporate ESG performance, and market participants‐institutional investors help to strengthen this policy effect. Overall, our study sheds light on the significant role of green financial policy in promoting corporate sustainability.

AGENCY COSTS AND COMPANY PERFORMANCE IDX 30

This study aims to examine the levels of corporate agency costs for high- and low-value companies listed on Indonesia Stock Exchange_30 (IDX30) during the Covid-19 pandemic, and then analyze the impact of corporate governance and debt on corporate performance, mediated by agency cost variables. The average expense ratio and asset utilization ratio values are used as the basis for determining high or low agency costs in the IDX30 Indonesia companies. Partial least squares structural equation modelling (Partial Least Square-Structural Equation Model) analysis is used to analyze the effect of corporate governance and debt on firm performance mediated by agency cost variables. The results indicate that the average agency costs in IDX30 companies are low. Corporate governance significantly affects the level of agency costs and firm performance. While the direct effect of debt on firm performance is not significant, its effect on firm performance mediated by low agency costs shows a significant relationship.

Information asymmetry, agency costs, and payout policies: An international analysis of IFRS adoption and the global financial crisis

Information asymmetry can affect the propensity of firms to pay dividends directly and indirectly by reducing the agency costs of free cash flow (FCF). However, designing a research framework to identify whether information asymmetry or agency cost directly explains the propensity to pay dividends is challenging, as both are partially endogenous. To overcome this challenge, this study investigates the role of two independent external shocks in explaining the propensity of firms to pay dividends. We use the mandatory adoption of International Financial Reporting Standards (IFRS) as an information asymmetry–reducing event and the global financial crisis (GFC) as an agency cost–reducing event to disentangle the effects of information asymmetry and agency costs. Using a large international sample of more than 100,000 firm-year observations and a matched sample of more than 35,000 observations, we find that the propensity to pay dividends declined after the mandatory adoption of IFRS and then declined further due to the economic shock of the GFC. We also provide evidence that firms facing high information asymmetry and high agency costs have a lower propensity to pay dividends because of the combined effects of IFRS adoption and the GFC. These findings suggest that the agency costs of FCF are more directly relevant in explaining dividend payout policy.