Measures Of Agency Costs Research Articles

Implications of Mediated Market Access—Exploring the Nature of Vertical Relationships within the Croatian Wine Industry

The aim of this research was to provide a better understanding of factors influencing the performance of (small) agricultural producers. Considering the importance of agricultural producers, not just for maintaining a steady supply of products but also for the preservation of the population (and cultural tradition) of rural areas, the development of sustainable agricultural business is a matter of public interest. This paper considers wine producers and their market channels, i.e., the factors influencing the relationship between wine producers and market intermediaries, by applying ideas taken from agency theory. We developed a conceptual model with our defined measure of agency costs as the mediator variable between multiple regressors and the firms’ financial and non-financial performance as regressions. We used the approach of Baron and Kenny to investigate whether agency costs act as a mediator variable. The data needed to test the proposed conceptual model were collected through questionnaires and contextual interviews with the Croatian wine producers (n = 124). We found that more self-reliance in the distribution process, supported by factors related to the bargaining strength, had a positive influence on wine producers’ performance. The results also support the assumption that agency costs act as a full mediator variable between a producer’s attributes and its performance.

Agency-Linked Risk Management with Ownership and Board Sub-Committee Governance: Evidence from an OECD Economy

From a risk management perspective, this study examines the role of ownership and board sub-committee governance on direct measures of agency costs in a small OECD economy—New Zealand. Using Logistic and OLS regression approaches, two proxies of direct agency costs are tested on a pooled sample of 466 firm-year observations ranging from 2012 to 2018. The study provides evidence that insider ownership concentration outperforms outsider ownership concentration in constraining agency costs. Moreover, audit committee independence can also effectively deter agency costs. These findings suggest that both insider ownership concentration and audit committee structure are important risk management mitigating factor for deterring agency costs in New Zealand companies.

Blockholding and agency cost: evidence from Nigeria

PurposeThe study examines how blockholding, blockholding nationality and multiple blockholder structures (MBS) are related to agency cost in Nigeria.Design/methodology/approachData sourced from the annual reports of 84 non-financial services firms listed on the Nigerian Stock Exchange (NSE) from January 1, 2008, to December 31, 2015, were analyzed using the hybrid model in Stata 15.FindingsBlockholding showed a significant negative relationship with the expense ratio (ER) measure of agency cost at the between-firm level but not significantly related to asset utilization ratio (AUR). This result was driven more by foreign blockholding and concentration of control, which were negatively and significantly related to the ER. Concentration of control is negatively related to the AUR. Domestic blockholding and the number of blockholders were not significantly related to agency cost. Foreign-blockholder-firms had a significantly greater concentration of control (lesser contest for control) than domestic-blockholder-firms.Practical implicationsThe findings suggest that foreign blockholding would be more effective in controlling agency costs in Nigeria. While the concentration of control (lesser contest for control) appears to be an efficient governance mechanism for reducing agency costs associated with expenses in Nigeria, it seems to exacerbate agency costs associated with asset utilization.Originality/valuePrevious researchers have not studied how foreign and domestic blockholding are related to agency cost. They also have not studied how MBS and the contest for control are related to agency cost and explain differences in the foreign/domestic blockholding-agency cost relationships in the Nigerian context.

Bank-appointed directors and idiosyncratic volatility: evidence from India

PurposeThe purpose of this paper is to empirically examine the impact of the bank-appointed directors on the agency costs of debt by using the idiosyncratic risk of stock returns as a measure of agency costs of debt.Design/methodology/approachWe use multivariate panel regression, event study and finally, propensity score matching approaches to test our hypothesis. The robustness of the results is tested for possible endogeneity issues by employing instrumental variable two-stage least square (IV-2SLS) technique.FindingsConsistent with the efficient monitoring hypothesis, we find a negative relationship between the presence of the bank-appointed director and the idiosyncratic volatility of stock returns among Indian firms. This implies that such firms take up less risky investment projects.Originality/valueWe contribute to the literature from two aspects. First, to the best of our knowledge, this is the first study that examines the monitoring efficiency of creditors' governance. Hitherto, such examinations are done from the shareholders' perspective. Second, we examine the role of the bank-appointed directors on the board of non-financial firms in an emerging world context and find, contrary to the existing evidence in the US context, active monitoring role played by such directors.

Corporate Governance Quality, Ownership Structure, Agency Costs and Firm Performance. Evidence from an Emerging Economy

The purpose of this paper is to investigate the effect of corporate governance quality and ownership structure on the relationship between the agency cost and firm performance. Both the fixed-effects model and a more robust dynamic panel generalized method of moment estimation are applied to Chinese A-listed firms for the years 2008 to 2016. The results show that the agency–performance relationship is positively moderated by (1) corporate governance quality, (2) ownership concentration, and (3) non-state ownership. State ownership has a negative effect on the agency–performance relationship. Various robust tests of an alternative measure of agency cost confirm our main conclusions. The analysis adds to the empirical literature on agency theory by providing useful insights into how corporate governance and ownership concentration can help mitigate agency–performance relationship. It also highlights the impact of ownership type on the relationship between agency cost and firm performance. Our study supports the literature that agency cost and firm performance are negatively related to the Chinese listed firms. The investors should keep in mind the proxies of agency cost while choosing a specific stock. Secondly; the abuse of managerial appropriation is higher in state-held firms as compared to non-state firms. Policymakers can use these results to devise the investor protection rules so that managerial appropriation can be minimized.

The role of agency costs in the voluntary adoption of XBRL-based financial reporting

PurposeThe purpose of this paper is to examine whether and how firm's agency costs played a role in the voluntary adoption of the eXtensible Business Reporting Language (XBRL) under the SEC's voluntary filing program (VFP) that encouraged the voluntary adoption of the XBRL.Design/methodology/approachThis study employs a logistics regression and a sample of 140 firms that voluntarily participated in the VFP during its entire existence in the United States, and 140 matched-pair counterparts that did not voluntarily adopt the XBRL to investigate the role of agency costs in the voluntary adoption of XBRL-based financial reporting.FindingsWe find evidence consistent with the conjecture that a firm's low magnitude of agency costs plays a significant motivating role in the voluntary adoption of XBRL-based financial reporting. Our results continue to hold after using an alternative measure of agency costs and conducting two-stage least squares regressions. Supplementing these results, the study also shows that the level of agency costs of voluntary XBRL adopters remains statistically unchanged after the adoption while the level of agency costs associated with the firms that did not participate in SEC's VFP significantly decline after the adoption during the XBRL mandate.Practical implicationsThe findings of this study suggest that based on a firm's level of agency costs, regulators and policymakers, especially those in countries that are yet to mandate XBRL reporting, can, in advance, identify firms that are more likely to comply with their new financial reporting initiatives.Originality/valueThis paper provides first evidence on the role of agency costs in the voluntary adoption of XBRL using data from the United States.

Estructura de capital, concentración de propiedad y política de dividendos como factores determinantes de problemas de agencia en empresas chilenas

The objective of this paper is to analyze the capital structure, the concentration of property and the policy of dividends as determinants of the problems of agency in Chilean companies. As a measure of agency costs, the asset turnover ratio was used as a benchmark for management efficiency in the use of the company's assets, which is an inverse measure of agency costs.
 
 The results show that a higher level of indebtedness seems to favor the discretional behavior of managers. However, there is also evidence that when the debt is a short-term debt, the divergence of interest decreases between shareholders and managers.
 The concentration of property on the other hand has a non-linear effect on the costs of agency, which means that, first, it acts as a mechanism to attenuate managerial discretion, but when it reaches a certain level, an effect of expropriation of major shareholders over minor shareholders seems to be produced. In relation to the dividend policy, a positive relationship is observed with efficiency in the use of assets, mainly in the presence of high growth opportunities.

Are Top Management Teams Compensated as Teams? A Structural Modeling Approach

This paper develops an empirical approach to explicitly test two multi-agent moral hazard models on executive compensation in S&P 1500 firms, which distinguish between a team perspective and an individual perspective. This approach assesses which model is more robust at rationalizing the observed relationship between executive compensation and firm performance. The results favor the team perspective under which unilateral shirking is assumed infeasible for managers. The analysis rejects the individual perspective under which each manager can unilaterally shirk. This paper also quantifies three model-based measures of agency costs. The risk premium can explain up to 37% of total compensation for higher-paid managers in large firms. This upper bound is higher than that of lower-paid managers and all managers in small firms. Shareholders could experience a reduction in equity return by 0.04-0.15 due to managers shirking. In addition, shareholders could benefit from switching from an individual-perspective contract to a team-perspective contract. Such counterfactual analysis predicts the risk premium could be reduced by $1 million-$17 million in the compensation of the higher-paid managers and $0.1 million-$3 million in the compensation of the lower-paid managers.

Agency costs in US banks - have the factors changed post crisis?

This study analyses the effectiveness of the series of post-2008 regulatory reforms in the banking industry. The paper aims to identify and classify new measures of agency costs. The results suggest that agency costs have increased in the post economic recession period. Agency costs have increased for all banks irrespective of sizes. A new theoretical framework on behavioural lines is proposed for the manifestation of agency costs. The study suggests that four types of behavioural factors result in agency costs – self-enrichment, complacency, cover-up and risk affinity. Agency costs originate due to the self-enrichment behavioural nature of managers. The study provides insights to the fact that management behaviour may adapt to both the external and internal environment to facilitate agency costs. The study suggests that the new regulatory measures may not have worked well on expected lines or may have provided adverse incentives which would have increased agency costs.

Agency costs in US banks - have the factors changed post crisis?

This study analyses the effectiveness of the series of post-2008 regulatory reforms in the banking industry. The paper aims to identify and classify new measures of agency costs. The results suggest that agency costs have increased in the post economic recession period. Agency costs have increased for all banks irrespective of sizes. A new theoretical framework on behavioural lines is proposed for the manifestation of agency costs. The study suggests that four types of behavioural factors result in agency costs – self-enrichment, complacency, cover-up and risk affinity. Agency costs originate due to the self-enrichment behavioural nature of managers. The study provides insights to the fact that management behaviour may adapt to both the external and internal environment to facilitate agency costs. The study suggests that the new regulatory measures may not have worked well on expected lines or may have provided adverse incentives which would have increased agency costs.

Vicarious Liability for Managerial Myopia

AbstractThis paper shows that fines on the firm (vicarious liability) can optimally deter misreporting by the firm’s manager. In a principal-agent model, shareholders choose whether to award equity compensation to a myopic (short-termist) manager. Equity induces effort and misreporting. The wedge between managerial and shareholders’ time horizons provides a measure of agency costs; more-myopic managers tend to misreport more, which increases expected fines. In equilibrium, large decreases in agency costs lead to more equity grants and more misreporting and are consistent with greater shareholder welfare. Social effects are, however, ambiguous given misreporting externalities. Counterintuitively, decreases in agency costs may decrease social welfare if vicarious fines are set too low: shareholders will award equity and induce misreporting even when not justified by the accompanying economic production. The proper level of vicarious fines results in a second-best optimum where shareholders award equity if, ...

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.

A balancing act: Managing financial constraints and agency costs to minimize investment inefficiency in the Chinese market

Using a large panel of Chinese listed firms over the period 1998–2014, we document strong evidence of investment inefficiency, which we explain through a combination of financing constraints and agency problems. Specifically, we argue that firms with cash flow below (above) their optimal level tend to under- (over-)invest as a consequence of financial constraints (agency costs). Furthermore, focusing on under-investing firms, we highlight that the sensitivities of abnormal investment to free cash flow rise with traditionally used measures of financing constraints, while for over-investing firms, the sensitivities increase with a wide range of firm-specific measures of agency costs.

Managerial Ownership and Agency Cost: Evidence from Bangladesh

This study examines the influence of managerial ownership on firm agency costs among listed firms in Bangladesh. This is an institutional setting that features a mixture of agency costs. This institutional setting has a concentration of ownership by managers, but the firms are not solely owned by managers. The extant literature suggests that the sacrifice of wealth by the principal and potential costs associated with monitoring the agents is known as the agency cost. This study uses three measures of agency cost: the ‘expense ratio’, the ‘Q-free cash flow interaction’, and the ‘asset utilisation ratio’. The finding of the study is that managerial ownership reduces the firm agency cost only under the ‘asset utilisation ratio’ measure of agency cost; this is robust with regard to a number of robustness tests. Furthermore, the non-linearity tests suggest that the convergence of interest is evident with very high and low levels of managerial ownership. The entrenchment effect by the owners is evident at moderate levels of managerial ownership. Although there has been great scepticism among management researchers on the validity of agency theory, overall, the findings of this study do not reject the validity of agency theory. Given that the entrenchment by managers is evident at certain levels of ownership and that the agency problem may still exist between insiders and outsiders, legislative guidelines for controlling share ownership may be required.

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.

Revisiting Agency Theory: Evidence of Board Independence and Agency Cost from Bangladesh

This study examines the influence of board independence on firm agency cost among listed firms in Bangladesh, which feature concentrated ownership and high insider representation on corporate boards. This study uses three measures of agency cost: the ‘expense ratio’, the ‘Q-free cash flow interaction’ and the ‘asset utilization ratio’. The finding of the study is that board independence can reduce the firm agency cost only under ‘asset utilization ratio’ measure of agency cost. These findings are robust to several robustness tests. Furthermore, the non-linearity tests suggest that the benefit of outside independent directors is generally plausible as a factor controlling agency costs in the case of a medium level of board independence. Overall, these findings do not reject the validity of agency theory, supporting the Anglo-American orthodoxy promoting outside independent directors as good monitors.

Agency Costs and Equity Mispricing

AbstractWe investigate a link between agency costs and equity mispricing. We employ comprehensive, multi‐dimensional measures of agency costs and mispricing, and find that mispricing is significantly and positively related to agency costs. We also explore the effect of equity‐based compensation on the impact of agency costs on mispricing. Our investigation extends previous studies that do not separately account for the options and restricted stock grants components of equity‐based compensation. We show that stock options, originally intended to resolve conflicts of interest, exaggerate the problem and this phenomenon is pronounced especially when firms are overvalued. Overall, our results imply that compensation packages that are not structured optimally could lead to greater mispricing.

Women on board, firm financial performance and agency costs

This study investigates the link between female board directors and company financial performance and agency costs in Sri Lanka's publicly listed companies. In order to investigate the impact of board gender diversity on firm financial performance, a dynamic panel generalised method of moment estimation is applied. Three variables are used as proxies for gender diversity of the board of directors, namely the percentage of women on the board, a dichotomous dummy and the Blau index. A Tobit model with endogenous regressors is used to investigate the impact of female board members on agency cost, using growth opportunities as a measure of agency cost. After controlling for size, industry and other corporate governance measures, this study finds a significant negative relationship between the proportion of women on boards and firm value along with an increase in company agency cost. This evidence provides insights for governments and academic institutions in their efforts to provide resources that will help enhance women's leadership skills.

More Long Term Compensation and... More Fraud?

I show that heeding recent calls to reduce agency costs and managerial short-termism may, in fact, lead to more fraud but better welfare outcomes. In the model, shareholders choose the manager's compensation in light of the manager's dual roles of exerting eort and making disclosures regarding the …rm's value. A measure of agency cost is provided by the manager's relatively shorter time horizon. Where agency costs are small, shareholders award equity compensation, leading to both eort and some level of fraud. Where agency costs are large, shareholders will be unwilling to award performance-based compensation due to the high level of fraud that managers would undertake. The principal …ndings are (1) fraud can be a sign of relative economic health, in that it is more likely to occur when eort is exerted and returns to eort are higher, (2) the incidence of fraud-inducing compensation increases as agency costs decrease, and (3) when agency costs are high, reductions in agency costs actually increase the incidence of fraud. Regulatory implications include that deterring fraud, even absent adjudicatory error, may be socially ine¢ cient; rather, policy should be oriented toward internalizing costs of fraud onto shareholders and enhancing freedom of contract.

Women on Board, Firm Financial Performance and Agency Costs

This study investigates the link between female board directors and company financial performance and agency costs in Sri Lanka's publicly listed companies. In order to investigate the impact of board gender diversity on firm financial performance a dynamic panel generalised method of moment estimation is applied. Three variables are used as proxies for gender diversity of the board of directors, namely the percentage of women on the board, a dichotomotons dummy, and the Blau index. A Tobit model with endogenous regressors is used to investigate the impact of female board members on agency cost, using growth opportunities as a measure of agency cost. After controlling for size, industry, and other corporate governance measures, this study finds a significant negative relationship between the proportion of women on boards and firm value along with an increase in company agency cost. This evidence provides insights for governments and academic institutions in their efforts to provide resources that will help enhance women's leadership skills.