Higher Agency Costs Research Articles

The Information Content of Corporate Earnings: Evidence from the Securities Exchange Act of 1934

We examine whether the Securities Exchange Act of 1934 increased the information content of corporate earnings disclosures. Prior research questions whether the Act improved disclosure quality but generally relies on long-window tests and yields mixed results. We focus on whether the Act increased earnings informativeness, improving upon prior designs by focusing on short earnings announcement windows and employing a difference-in-differences design to control for potential contemporaneous structural changes. We document an increase in earnings informativeness following the Act, which is larger for treatment firms (which withheld disclosure before the Act) than for control firms. The increase in informativeness is more pronounced for small firms (consistent with a relatively larger change in enforcement), profitable firms that do not pay dividends (consistent with higher agency costs), and firms reporting good news (which suggests that the Act increased conservatism).

Can the academic experience of senior leadership improve corporate internal control quality?

In this paper, we investigate whether the academic experience of senior corporate leaders, often referred to as ‘top management’, impacts the quality of corporate internal control. Data collected from Shanghai and Shenzhen A-share listed firms in China demonstrate that senior leaders having academic experience can improve corporate internal control quality significantly. This study also finds that this impact varies with a firm’s agency costs and risk. In firms with higher agency cost (state-owned or larger firms) or higher risk, academic top managers play a more significant role in improving corporate internal control quality. The results are attributed to higher ethical standards, risk aversion and risk management abilities of senior executives given the perspectives awarded them during their academic experience. Further analysis shows that the differing roles of senior executives within such teams are quite distinct in how they improve internal control quality. Our findings contribute to the current internal control literature and have policy implications for evaluation of corporate internal control. It may also help enhance the processes in recruiting and selecting senior executives.

Empirical analysis of the effect of the joint provision of audit and sustainability assurance services on assurance quality

Recent papers have investigated how assurance increases the credibility of, and confidence in, sustainability disclosure. However, there is debate about the quality of this process. As part of this debate, the authors examine, firstly, whether the provision of audit and sustainability assurance services by the same practitioner affects the quality of the assurance, focusing on a trade-off between the knowledge spillover effect and the economic dependence effect. Secondly, the authors also examine whether the industry specialization of the assurance provider could moderate the above relationship, reinforcing the knowledge spillover or reducing the economic dependence effects. Using international data from the period 2007–2016, evidence supports that the provision of audit and sustainability assurance services by an incumbent auditor produces knowledge spillover, leading to higher assurance quality. Results also find that industry specialization increases the provider’s knowledge of matters on which sustainability assurance is given and enhances the impact of joint provision on assurance quality. The analysis is further extended to explore this evidence in contexts characterized by higher agency costs, by a country’s greater stakeholder-orientation, a country’s greater rate of demand for assurance, and countries where assurance is non-mandatory.

Factors Affecting Performance in Companies with High Agency Costs

Objective – This research focuses on manufacturing companies with high growth rates, as measured by the Tobins'Q proxy. The high growth of a company is closely related to higher agency costs, compared to companies with low growth rates. We investigate the influence of the board of commissioners, directors, audit committees, bid-ask spreads on the high agency costs of manufacturing companies listed on the Indonesia Stock Exchange. The indicator of agency costs in this study are the EXPR and AUR ratios. Design/methodology – The population of this study are manufacturing companies listed on the Indonesia Stock Exchange. Purposive random sampling resulted 111 samples of companies with high growth rates. This study uses multiple linear regression analysis. The first analysis with EXPR independent variable and the second analysis with AUR independent variable, both variables could be used as agency cost indicators. Results – The result reveals that the board of commissioners and directors have a positive effect on the agency costs, which are measured by the EXPR and AUR ratios while the audit committee has a negative significant effect on the high agency costs as measured by the EXPR ratio. Moreover, bid-ask spread as a control variable has a significant positive effect on AUR. The presence of monitoring quality, pressure, reputation of the board of commissioners and audit committee will reduce the types of management policy which may increase agency conflict.

Integrated reporting and earnings quality: The moderating effect of agency costs

Prior studies have suggested a link between disclosure mechanisms and accounting information quality. They also report better quality information in the presence of higher transparency and clarity in disclosure mechanisms. We contend that voluntary integrated reporting (IR) as a disclosure mechanism has an incremental positive effect on accounting information and particularly the quality of reported earnings. Consistent with this argument, we find a positive relationship between voluntary adoption of IR practice and earnings quality. Furthermore, while voluntary adoption of IR is positively associated with earnings quality for firms experiencing high agency costs, the moderating effect of firm level agency costs have an insignificant effect on the relationship between voluntary IR practice and the level of integration. We find no evidence consistent with the proposition that managerial opportunism is relevant in shaping the effectiveness of IR practice for quality disclosure when a higher level of integration is achieved. Moreover, we find no evidence that firm complexity affects the relationship between IR practice and earnings quality. Overall, our findings are consistent with the view that IR wields an incremental positive effect on the quality of accounting information.

WORKING CAPITAL FINANCING PREFERENCE AMONG SMALL BUSINESSES IN CAMBODIA

The purpose of this paper is to investigate working capital financing preference among small businesses in Cambodia using a quantitative and qualitative approach. Small business often relies heavily on internal finance as a major source of short-term finance for working capital needs. This is because small businesses are likely to face problems associated with their size when accessing external finance, such as information asymmetry and higher agency costs. Interestingly, using descriptive statistics and inferential statistics, the findings lead us to believe that these firms mostly relied on internal sources (retained profit, early settlement discount, delayed payment to suppliers) of finance as compared to external sources (bank loan and equity). In some cases, they have to rely on informal sources (private, family, friend, money counting/lenders, funds/wealthy families, rotating savings and credit associations) to finance working capital requirement. These results suggest that firms experience significant information costs that prevent them from gaining access to traditional sources of financing. The findings of the study will be useful to the financial institutions that fund SMEs and can help the policymakers to formulate strategies and programs that will support SMEs at different stages of the financial chain in Cambodia.

International diversification and corporate cash holding behavior: What happens during economic downturns?

This study uses fixed-effect regressions estimated with heteroskedasticity-consistent standard errors to investigate the effect of international diversification on corporate cash holding behavior of French-listed firms during economic downturns. The findings show that internationally diversified firms are less inclined to save cash out of their cash flows than their undiversified counterparts. However, during economic downturns, the relationship shifts and shows that international diversification is positively associated with the propensity of firms to save cash out of their cash flows. The negative relationship between international diversification and the propensity of firms to save cash out of their cash flows suggests that risk-reducing effects coupled with easy access to external finance prevail over the high agency costs and information asymmetry associated with international companies. However, during economic slumps, this relationship becomes positive, highlighting a significant influence of the financial crisis on internationally diversified firms relative to their stand-alone counterparts. Thus, this study should provide useful insights for academics, practitioners as well as financial regulators.

Industry-Finance Integration and Corporate Innovation

This article takes China’s A-share listed companies from 2008 to 2017 as a sample to study the relationship between industry-finance integration and corporate innovation, and discusses the differential impact of industry-finance integration on corporate innovation under different agency costs and financing constraints. In addition, in order to clarify the path that the combination of industry and finance affects corporate innovation, this article further explores the mechanism of the combination of industry and finance on corporate innovation. The study found that at this stage, the integration of domestic and domestic financing has a significant “crowding out” effect on corporate innovation, and this “crowding out” effect is even more pronounced in companies with higher agency costs and greater financing constraints. After controlling for endogeneity and performing a robustness test, the conclusion still holds. Further mechanism inspections have shown that the combination of production and finance increases the business risk of the enterprise, which in turn crowds out innovation. The above research conclusions show that at the current stage, the combination of industry and finance of listed companies in China has not effectively achieved the long-term strategic goals of the enterprise, but has increased the business risk of the enterprise, inhibited the innovation investment of the enterprise, and caused the real economy to face a situation of “depreciation to reality” threat. This article provides micro-level evidence for China’s domestic financial integration practice, and has certain reference significance for how regulatory authorities can guide the integration of industry and financial integration and how Chinese enterprises can prevent and control financial risks. The main contribution of this article is to combine the institutional background of China’s economic transformation and consider the differences between the internal and external environments facing different companies. The empirical analysis tests the relationship between the combination of industry and finance and corporate innovation. In addition, the role of this relationship is further studied from the perspective of operational risk, which provides a certain decision-making reference for Chinese enterprises on how to improve the effectiveness of the combination of industry and finance.

Group-affiliated Firms and audit fees: Evidence from India

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

The separation of property and control and its costs a century old problem that seems modern

The Agency Costs resulting from the conflict between principals and agents, due to the separation of ownership and control in the capitalist enterprise, was analyzed in many works of the last century. Could we assume that the current globalization of companies has increased the differences between principals and agents? Does this scenario lead to an increase in Agency Costs in those companies with the greatest presence in the global economy? The objective of this article is to compile studies that will allow us to answer these questions affirmatively and conclude that large transnational, multinational or global companies involve higher Agency Costs than those that remain within national borders.

Free cash flow and position-related consumption of senior management-based on empirical data of state-owned listed companies

The ultimate owner of the state-owned listed companies is the State, but the State cannot directly participate in the supervision of the managers of the company, so the owner may be “absent” in many state-owned listed companies, leading to excessive position-related consumption of the company’s senior management by using the resources of the company in order to seek personal benefits. When the free cash flow is abundant, the senior management will more intend to put it into their own position-related consumption, resulting in higher agency costs. This article collects the data of A-share state-owned listed companies from 2009 to 2015 as research sample, and empirically studies the impact of free cash flow and the “Eight Regulations” on the position-related consumption of senior management. According to the research, excessive free cash flow will promote the position-related consumption of senior management of state-owned listed companies, resulting in higher agency costs; and in case the enterprise has certain free cash flow, the promulgation of the “Eight Regulations” has a restraining effect on the position-related consumption of senior management in the state-owned listed companies.

Custos de Agência e Estrutura de Controle em Empresas Petrolíferas

Resumo Este estudo se propõe a analisar a influência da participação estatal no controle de empresas petrolíferas listadas em bolsas americanas sobre os seus custos de agência, levando em conta características destas companhias. Os resultados indicam que empresas com participação estatal tendem a apresentar maiores custos de agência que seus pares privados quando consideramos a eficiência no uso dos ativos. Utilizando um índice de gastos discricionários os coeficientes sugerem a mesma conclusão, embora não sejam estatisticamente significantes. Adicionalmente, o tamanho das companhias e o seu grau de alavancagem se mostraram fatores relevantes. JEL Code: L6, D23, G32.

Financial Advice: Does it Make a Difference?

The financial advice profession provides a potentially valuable service to consumers within an increasingly complex financial marketplace. Financial advice professionals can substitute for costly investment in financial knowledge by households. This paper provides evidence that financial advisers improve financial outcomes when the interests of the advisor and household are aligned. However, professional advice can harm consumers if conflicts of interest create high agency costs. Understanding how differences in compensation methods and regulatory frameworks affect incentives is essential to improving the breadth and quality of professional advice.

Agency costs of free cash flow and conditional conservatism

This study investigates whether agency costs of free cash flow (FCF) are associated with conditional conservatism. Prior research documents that conditional conservatism improves ex ante efficient investment decisions and facilitates ex post monitoring of managers’ investment decisions. As conditional conservatism can provide protection from possible managerial expropriation, the demand for conditional conservatism should increase with the agency costs of FCF. Using excess cash as a proxy for the agency costs of FCF, I provide evidence that firms with higher agency costs of FCF incorporate losses in a timelier manner relative to gains compared to their counterparts. Additionally, the association between excess cash and conditional conservatism predictably varies with the presence of alternative monitoring mechanisms that mitigate FCF problems, such as debt or dividend payouts or repurchases. Further investigation suggests that greater conservatism is associated with a lower likelihood of overinvestment among firms bearing high agency costs of FCF, demonstrating the ability of conservatism to reduce agency costs of FCF.

Enterprise Risk Management and Corporate Governance

Purpose: This paper aims to investigate whether firm ownership can explain the ERM adoption. In particular, we examine the relationships between the presence of large controlling shareholders, multiple blockholders and a dual-class share mechanism, and ERM. ERM best practices are regarded as governance tools used to monitor managerial discretion in risk management, ultimately reducing the agency cost of risk management. Ownership is one of the governance mechanisms that determines the level of monitoring in the firm. Accordingly, we analyze whether ERM is demanded more in certain ownership settings. Design/methodology/approach: By using a sample of listed Nordic firms, the paper uses tobit and logit models to analyze the relationship between ownership and ERM. Ownership data is hand-collected while ERM data comes from a survey directed to senior executives regarding how their firms organize their risk management programs. Findings: We find that ERM is favored less in firms i) where there are multiple blockholders, and ii) where large controlling owners hold dual-class shares. Overall, our findings suggest that there is less need for ERM’s monitoring role in firms that are associated with high agency costs. Originality/value: This study contributes to the literature in the following two ways. First, to our best knowledge, we are the first to provide evidence on the relationship between the presence of multiple blockholders and dual-shares, and ERM. Second, this paper is the first to investigate the relationship between firm ownership and ERM by including all types of owners and all types of listed firms in our sample. Practical implications: These findings have important implications for firms with multiple blockholders and the growing number of firms that have recently been listed on exchanges with dual-class shares.

The CPC party organization in privately controlled listed companies and earnings management

ABSTRACTThis paper studies the real effect of the party organization of Communist Party of China (hereafter, CPCPO) on the privately controlled listed companies’ governance from the perspective of earnings management. We find a significantly negative relationship between the party organisation activities and earnings management. The possible mechanisms are to encourage controllers of those firms to participate in the activities of CPCPO and even serve as the secretaries, and to make directors whom are CPC party member enter audit committee. Furthermore, this relationship is more pronounced when the chairman or CEO is a CPC member, has political connections, and when the time is politically sensitive period. The relationship is also more pronounced in companies with higher agency costs, weaker information environments, and greater financing constraints. Different from previous literature focusing on the role of CPCPO in state-owned enterprises, this paper explores the governance role of CPCPO in privately controlled firms.

Firm Leverage, Agency Costs and Firm Performance: An Empirical Research on Service Firms in Turkey

The agency theory suggests that loan can reduce the agency problem of shareholders-managers (enhance the agency problem of shareholders-lenders) and increase (decrease) the performance of a firm. This article analyzes the impact of firm leverage on the performance of firms with high and low agency costs. Using the ordinary least squares (OLS) method and the 2008-2017 data of 52 firms whose stock certificates are processed in the service sector in Istanbul Stock Exchange; it was determined that leverage had a negative impact on firm profitability and that impact was higher for firms with higher agency costs (firms with higher growth opportunities and fewer tangible assets) and lower for firms with agency costs of free cash flows (firms with higher free cash flows).

The substitution hypothesis of agency conflicts: Evidence on Shariah compliant equities

According to the substitution hypothesis and recent evidence, firms that are better governed carry less debt and experience fewer agency problems. This may also imply that firms with lower debt are better governed and experience lower agency costs. We test this hypothesis by comparing the agency costs of Shariah compliant (SC, and therefore low debt) and Shariah noncompliant (SNC) firms, using a proprietary dataset comprising constituents of the Dow Jones Islamic index for the period 2006–2015. The findings support the hypothesis but are contingent on the firm's idiosyncratic risk; SC firms with low idiosyncratic risk have higher agency costs.

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.

Does Corporate Social Responsibility Facilitate Public Debt Financing?

This study investigates debt market benefit of socially responsible firms. We find that better CSR performance increases the share of public debt to total debt. Such effect is stronger for firms facing high agency and information costs, confirming that CSR drives debt structure by mitigating these frictions. The effect of CSR is weaker for firms in sinful industries or in low-trust regions where CSR is likely to be viewed as window dressing. Furthermore, utilizing BP oil spill event, we document that the effect of CSR becomes stronger after this event but only for non-sinful firms. This finding indicates that investors seem to value CSR more after a severe environmental disaster only for non-sinful firms, and they still perceive CSR as window dressing for sinful firms. Our evidence survives endogeneity checks and suggests that CSR facilitates firms’ access to public debt market especially when CSR is perceived as a genuine commitment.