Increase Agency Costs Research Articles

Corporate Violations and Audit Opinions: Warning Effect or Uncovering Effect?

ABSTRACT This paper investigates the impact of corporate violations on audit opinions in China. Using the sample of Chinese listed A-share companies over the period 2004–2020, we find that corporate violations increase the likelihood of modified audit opinions (MAOs). Corporate violations increase MAOs likelihood by increasing agency costs, weakening internal control, improving earnings management, and reducing corporate profitability. The effect is more significant for firms with a lower proportion of female executives, higher risk preference of executives, and lower quality of information disclosure. These results have important policy and managerial implications, illustrating how agency conflicts stemming from corporate violations can influence audit opinions.

Does banking relationships promote environmental, social, and governance performance? Empirical evidence from A‐share listed firms in China

AbstractThis study investigates the impact of banking relationships on corporate environmental, social, and governance (ESG) performance using data from A‐share listed firms in China from 2009 to 2019. Results show that banking relationships negatively impact corporate ESG performance. Mechanism analysis finds that banking relationships increase agency costs and financial investment, thereby diminishing ESG performance. Corporate executives with banking backgrounds and banks holding firm shares dampen ESG performance, whereas firms holding bank shares do not yield significant impact on ESG performance. Our study also finds that the negative impact of banking relationships on ESG performance is mitigated by analyst attention and supervisory institutional investors.

Competitive imitation and corporate innovation in private enterprises

The private economy has always been an important force in promoting the development of China's national economy. The unfair competition faced by private enterprises (PEs) compared to that faced by state-owned enterprises (SOEs) in many areas will induce the competitive imitation of PEs. We find that PEs' competitive imitation strategy significantly inhibits innovation, while increased agency costs and reduced R&D investment are the two main mechanisms for this inhibitory effect. Furthermore, we find that this effect is stronger in firms with lower growth rate, worse information environment and stronger product market competition. However, the competitive imitation of PEs will eventually damage their innovation efficiency.

Economic policy uncertainty and cash dividend policy: evidence from China

This paper investigates the impact of economic policy uncertainty (EPU) on the dividend policy of listed companies, alongside its underlying mechanisms. Based on a panel data compilation from 4421 Chinese listed companies spanning 2007 to 2021, the research demonstrates that EPU significantly increases the cash dividends of listed companies. Our findings resolve endogeneity issues and are robust to different variable definitions. The influence is more significant among smaller, non-state-owned companies, as well as those with lower equity concentration and lower financial constraints. We further find that EPU heightens investors’ demand for dividends, increases agency costs, and reduces business growth opportunities to improve companies’ dividend distribution tendency. Moreover, we find that increasing dividend payout when EPU increases is aligned with shareholders’ wealth maximization objective.

Too much of a good thing: the dual effect of executive equity incentives on corporate social responsibility performance

PurposeResearch on the effect of executive equity incentives is equivocal. Based on agency theory, some scholars take the convergence of interest logic to highlight the benefits of executive equity incentives. In contrast, others adopt the entrenchment logic to emphasize the increased agency costs. This study attempts to reconcile the debate on executive equity incentives and integrates the opposing views to unveil how executive equity incentives impact corporate social responsibility (CSR) performance.Design/methodology/approachUsing the panel dataset of Chinese A-share listed firms from 2006 to 2022, this study integrates the convergence of interest and entrenchment logic to examine how executive equity incentives affect CSR performance.FindingsWe find that the relationship between executive equity incentives and CSR performance follows an inverted U-shaped form. According to the convergence of interest logic, executive equity incentives reduce agency costs when allocating resources to engage in CSR activities and enable firms to increase their CSR investments, ultimately realizing increased CSR performance. After a threshold, however, the accumulation of extensive equity incentives causes the entrenchment effect, resulting in declined CSR performance. Our empirical results also shed new light on its contingent perspective – the inverted U-shaped relationship is attenuated when firms’ stock liquidity is high.Originality/valueThis study attempts to reconcile the debate on executive equity incentives and integrates the opposing views to unveil the inverted U-shaped relationship between executive equity incentives and CSR performance. Our study opens promising avenues for further research on corporate governance and CSR strategies.

数字化转型、高管行为与企业代理成本

Nowadays, digitization is regarded as a hot topic that can improve the core competitiveness of enterprises, and whether the agency problems existing in enterprises can be alleviated with the application of digital technology is still a black box. This article takes companies listed on the Shanghai and Shenzhen A-shares from 2010 to 2022 as samples and uses empirical research methods to explore the impact and mechanism of digital transformation on corporate agency costs. The research results indicate that digital transformation will increase the agency costs of enterprises. Mechanism analysis found that digital transformation increases agency costs by increasing executive compensation stickiness and on-the-job consumption, but through internal overseas talent recruitment and external financial institution shareholding, agency problems caused by digital transformation can be alleviated. Further analysis reveals that although digital transformation exacerbates the agency problem of enterprises and has a more significant impact on non-state-owned, mature, non-high-tech, and eastern region enterprises when conducting digital transformation, while increasing costs, digital transformation also improves the input-output rate of enterprises and alleviates financing constraints. In summary, the research results demonstrate the impact of enterprise digitization from the perspective of corporate governance, providing new solutions and ideas for reducing agency issues in enterprises, and enriching and expanding research on the impact of technological innovation on the economy and society.

Does deterioration in rule of law per se create or destroy value?

Abstract We investigate the link between the rule of law and equity returns in post-transitional economies over the period January 2010–December 2020 by using panel data regressions. By applying several rule-of-law proxies for national legal frameworks and justice system quality as proxies for the rule-of-law principle, the data sets from the capital markets of Poland, Latvia, Lithuania, and Estonia showed that country-level judicial system quality is an important driver of company market performance, and that post-transitional countries with lower rule-of-law measures exhibit higher returns on equity than those with better measures. Our results support the idea that since poor governance and country instability increase agency and transaction costs, in addition to decreasing growth prospects and profitable projects available to companies, the risk premium demanded by investors increases, leading to higher equity returns.

The challenges of maturity mismatch in investment and financing for sustainable development of carbon-intensive enterprises.

To contribute to the research on the role of financial activities in corporate development, this study addresses the critical issue of short-term debt financing for long-term investment (SDFLI) and its impact on the sustainable development of carbon-intensive enterprises in China. By analyzing panel data from the A-share listed carbon-intensive enterprises in China spanning from 2010 to 2021, this study aims to shed light on the significance of this phenomenon and its implications. The empirical findings reveal the existence of a maturity mismatch between investment and financing in carbon-intensive enterprises, which exerts a significant negative impact on total factor productivity (TFP) and poses challenges to their sustainable development. Furthermore, the adverse effects of maturity mismatches vary across different types of enterprises based on factors such as ownership, industry characteristics, financing constraints, and internal controls. The results of the mediation effect model demonstrate that maturity mismatch hampers the sustainable development of carbon-intensive enterprises by reducing investment efficiency and increasing agency costs. Additionally, the moderating role of innovation in carbon-intensive enterprises between maturity mismatch and sustainable development is also examined. This research provides insights to establish policies for facilitating sustainable development in carbon-intensive enterprises.

The research on non-linear relationship between enterprise digital transformation and stock price crash risk

This paper uses data from Chinese A-share listed enterprises to examine digital transformation’s impact and intrinsic mechanisms on the risk of stock price collapse. This paper finds that the impact of digital transformation on the risk of stock price collapse follows an inverted U-shaped trend characterized by initial exacerbation followed by subsequent suppression. Furthermore, we find that as most Chinese enterprises are still positioned at the left end of the inverted U-shaped curve in terms of their level of digital transformation, the impact of digital transformation on the risk of the stock price collapse is mainly characterized by exacerbation. Moreover, we discover that digital transformation influences the risk of stock price collapse by increasing agency costs and fostering managerial overconfidence. Lastly, the heterogeneity analysis results indicate that digital transformation’s impact on the risk of stock price collapse varies among different types of enterprises. The exacerbation effect of the former on the latter is primarily observed in small-sized and non-high-tech enterprises. Additionally, as the digital transformation progresses, large-sized enterprises and high-tech enterprises can benefit more rapidly from its positive empowering effects.

Does powerful executive holding a dual post as the board secretary reduce nonpunitive regulation?

To test whether powerful executives serving concurrently as board secretary can influence nonpunitive administrative supervision, this paper employs a sample of 2014–2020 Chinese A-share listed companies for empirical analysis. Results show that firms with powerful executives serving concurrently as the board secretary are more likely to be questioned by the Exchanges. The mechanism test shows that powerful executives serving concurrently as the secretary can increase agency costs and reduce information quality. Further findings illustrate that for companies with powerful executives holding a dual post, the issues mentioned in the comment letters are more serious, and the probability of a late reply is higher. Moreover, the concurrent appointment of the vice president or director is more likely to cause the company to be questioned, while this is not the case for the CFO. This paper shed new insights on the evaluation of the economic consequences of the powerful executives holding a dual post as the board secretary based on comment letter data.

Board authority culture, cultural diversity and corporate innovation

ABSTRACT Culture is the core factor of corporate innovation, and board culture is the core embodiment of cultural factors in corporate governance. Board culture will have an important impact on corporate innovation, So what kind of board culture can Chinese boards build to better contribute to corporate innovation? Based on this core issue, this paper empirically explores the relationship between board authority culture, board cultural diversity and corporate innovation from the unique perspective of board culture. The results show that board authority culture is negatively related to corporate innovation; board cultural diversity can negatively regulate the relationship between board authority culture and corporate innovation, that is, the construction of diverse board culture of the Chinese board is more conducive to corporate innovation. The main reason why board authority culture inhibits corporate innovation is that board authority culture has obedience effect and inhibits corporate innovation through the path of increasing agency costs and weakening management risk preferences. Further research finds that the negative moderating effect of board culture diversity on the relationship between board authority culture and corporate innovation is more effective when the chairman has the highest authority directorship and has reputation authority but not political resource authority and organisation authority.

Strategic deviation and corporate green innovation

This study investigates the impact of strategic deviation on corporate green innovation. Using a sample of Chinese listed companies during 2006–2019, we find that strategic deviation is negatively associated with corporate green innovation. Mechanism tests show that strategic deviation increases agency costs and information asymmetry, intensifies financial constraints, and thus reduces corporate green innovation. Heterogeneity analyses suggest that the characteristics of state-owned enterprises and heavily polluting industries partially offset the negative impact of strategic deviation on corporate green innovation. This study contributes to the growing literature on the economic consequences of strategic deviation and has policy implications for promoting corporate green innovation.

Accounting Information Quality, Tax Avoidance and Companies' Performance: the Moderate Role of Political Connection

Purpose: This study examines the relationship between the accounting information quality, tax avoidance, and political connection in all Jordanian companies listed on Amman Stock Exchange. The current study also investigates the moderating effect of political connections on accounting information quality and company performance relationships. Further, the study examines the moderating effect of political connection on tax avoidance and company performance relationship. Theoretical framework: Political connections, tax avoidance, and the quality of accounting information affect a company's performance. According to the agency theory, reliable accounting information improves business performance and resources’ allocation efficiency by reducing information asymmetry. Additionally, the adverse effects of politics on companies are mitigated by accounting information quality. As a result, the cash flow is allocated effectively, improving the business's overall performance. Design/methodology/approach: The study uses the ordinary least squares (OLS) and applied moderated multiple regression (MMR). The sample data of this study includes 2266 company-years observations over the period 2008-2018 for all Jordanian companies listed on Amman Stock Exchange. The study compares accounting and market-based measurements of companies' performance (ROE, Tobin's Q). Findings: The study reveals consistent results among the measure. The results support the agency theory and found that accounting information quality reduces information asymmetry and positively affects companies' performance. Also, tax avoidance helps the companies to have more cash, and the results indicate a significant positive effect on companies' performance. In addition, the results support the agency theory argument and found that politics increase agency costs and negatively affect companies' performance. However, further analysis found that political connections sustain the positive effect of accounting information quality, which is a robust governance mechanism in Jordanian listed companies. Finally, the results found that tax avoidance with more political connections harms companies' performance. Research, Practical & Social implications: This study helps policymakers increase the governance mechanisms function in Jordanian listed companies. Also, the higher political relationship with the companies could be affected negatively on the Jordanian companies' achievement. Originality/value: The findings suggest several consequences for the fields of accounting and corporate governance. Additionally, the Middle East nations, including the Jordanian market, have had numerous economic difficulties that this study aids in resolving. For example, antagonistic political ties, information asymmetry, and insufficient allocation of financial resources.

How much state ownership is more conducive to corporate innovation in firms? Evidence from China

ABSTRACT Using 2009 to 2020 data for Chinese A-share listed firms in Shanghai and Shenzhen, we examine how much state ownership in firms is most conducive to improving corporate innovation quantity and quality. Our results are as follows: First, state ownership enhances corporate innovation by alleviating financing constraints (resource availability) but inhibits corporate innovation by weakening risk-taking (innovation willingness) and increasing agency costs (resource efficiency), leading to an inverted U-shaped relationship between state ownership and corporate innovation. Second, the percentage of state ownership that maximises innovation quality differs from that of maximising innovation quantity. State-owned enterprises (SOEs) can choose an appropriate state-ownership structure according to the actual situation in the mixed-ownership reform process. Third, non-state-owned shareholders’ control right negatively moderates the inverted U-shaped relationship between state ownership and innovation quantity but do not significantly moderate the inverted U-shaped relationship between state ownership and innovation quality. Fourth, foreign direct investment (FDI) negatively moderates the inverted U-shaped relationship between state ownership and innovation quantity and quality. Our findings reveal the impact of state ownership on corporate innovation and its transmission path, providing empirical evidence for optimising the ownership structure based on a corporate innovation perspective in the process of SOE mixed-ownership reform.

The impact of cash holding on stock returns in small and medium enterprises on the Egyptian Nile Stock Exchange

This paper explores the impact of cash holdings on stock returns in small and medium enterprises. The sample includes 24 SMEs listed on the Egyptian Nile Exchange, excluding service firms, with a total of 96 observations from 2016 to 2019. Data was collected from financial statements and reports obtained through an information dissemination company in Egypt. This study uses a panel data analysis with comparing all results via ordinary least squares and the generalized method of moments. The findings show a statistically significant negative effect of cash holding on stock returns in small and medium enterprises on the Egyptian Nile Exchange. Further, the evidence shows that firms with higher levels of cash holding have higher investment alternatives and then lower stock returns. This result supports the agency theory that an increase in cash holding leads to managers exploiting cash resources to achieve personal benefits, thus increasing agency costs, lowering investment efficiency, and therefore lowering stock returns. The results support the trade-off between risk and return by using cash holding to finance operational activities and investing in higher investment alternatives and then lower stock returns.

Business is Personal: How CEO Personality Influences Agency Costs

Corporate governance scholars have provided a host of governance mechanisms to control agency cost but have largely ignored how personality traits inherent to CEOs may influence their self-serving behavior and the resulting agency cost. In this study, we draw upon the most influential and comprehensive framework in personality psychology, the five-factor model, and theorize that more agreeable and conscientious CEOs incur lower agency cost while more neurotic CEOs incur higher agency cost. We examine the effect of these personality traits on two important manifestations of agency cost—unrelated diversification and the decoupling of CEO pay from firm performance. Using an open-language machine learning program, we operationalize Big Five personality traits of CEOs from S&P 1500 firms. We find that a CEO’s agreeableness and conscientiousness reduce agency costs, while the CEO’s neuroticism increases agency costs.

A Study of Regional Economic Disparities and Coordinated Development Based on Improving Grey Model Combinations

The positive promotion of regional economic growth is largely consistent with expectations, while there is also a promotion effect on the economic growth of neighboring regions. In this paper, the individual cognitive term of the particle swarm algorithm is introduced into the bath algorithm, and economic forecasting analysis is carried out based on the improved combination of grey model improvements. The main reason for the negative correlation between government investment and economic growth is that, although OFDI promotes economic growth, industrial upgrading, and optimizes industrial structure, it may also reduce regional export capacity, reduce employment opportunities, and increase agency costs. The estimated coefficients for human capital, labor input, capital stock, and urbanization rate are all positive, indicating that each variable is conducive to promoting regional economic growth.

Does employee ownership reduce agency costs? Evidence from French listed companies

Employee stock ownership (ESO) is often associated with reductions in agency costs because it increases employee satisfaction and attachment to their company and aligns the interests of employees with those of their firm. Another stream of research argues that ESO may have the opposite effect on agency costs because it serves as a management entrenchment tool and leads to divergence between stakeholders. This paper examines the relationship between ESO and agency costs in France, which is a leading European country for ESO. Using a panel database of 125 firms over the period 2002–2016, we find an inverted U-shaped relationship between ESO and agency costs. That evidence highlights that low levels of ESO increase agency costs, which is consistent with managerial entrenchment mechanisms. The findings also suggest that beyond a certain point, ESO reduces agency problems because it links employee wealth to their firm’s success.

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

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

From the Throne to the Kingdom: Employee Empowerment in Owner-Managed Firms

I develop a model explaining procedural aspects of employee empowerment in owner-managed companies. Based on 22 interviews with representatives from six owner-managed firms active in the Swiss main- and ancillary construction industry, I find that firm complexity and resource necessity act as a regulator for growth ambitions forcing these firms to empower their employees. I find that employee empowerment in owner-managed firms can be executed through mechanisms of participative leadership, professionalization of collaboration and ownership dispersion. Furthermore, my study sheds light on effects of employee empowerment such as benefits tied to reduced owner-manager dependence or downsides linked to increased agency costs. My model thus presents integrative theorizing of the drivers, mechanisms, and effects of employee empowerment in owner-manager firms.