Mitigate Agency Problems Research Articles

Product market competition and audit fees: evidence from an emerging market

PurposeProduct market competition may have various impacts on audit fees. On the one hand, according to the agency theory, product market competition can mitigate agency problems between management and shareholders. For clients with higher product market competition, auditors will lower the level of engagement risk assessment and reduce the required level of audit evidence, and hence audit fees will be lower. On the other hand, according to the audit risk model, product market competition will increase client business risk and audit engagement risk. Moreover, for clients with competition advantage, client business risk and audit engagement risk will be lower, and hence a lower audit fee. The paper aims to discuss this issue.Design/methodology/approachIn this paper, the authors collect financial accounting data and audit fee data from CSMAR database. Our sample selection starts with all available observations on the Chinese listed companies during 2006–2011. Since there is a big difference in accounting practices between financial companies and other industries, the authors delete observations on financial companies. The authors further remove observations with missing data, yielding 6,709 observations for the final analysis. To define the industry, the authors use the first two digits of standard industry classification code set by China Securities Regulatory Commission. In order to reduce the effect of extreme observations, the authors also truncate the data at 1 and 99 percent. The authors use the Herfindahl–Hirschman index (HHI) and the natural logarithm of the number of listed companies within the industry to measure product market competition intensity. HHI is calculated as the sum of the squared percentage of revenues of the client firm among the total revenues of all public companies, i.e. . N is the number of listed companies in the industry, Si is the revenues for an individual firm and S is the total revenues of all public companies within the same industry. A higher HHI score indicates fewer companies dominate the industry and hence lower intensity of competition in the product market. The second measure of industry competition intensity is LNN, the natural logarithm of the total number of public companies in the same industry of a client firm. A larger value of LNN indicates a larger number of competitors in the industry, and a higher level of competition intensity. Following the literature (Kale and Loon, 2011), the authors use Lerner index (or price-cost margin (PCM)) to measure the listed company’s competitive advantage. It is actually a measure of a firm’s power to influence product prices in the industry. The authors adopt the Peress (2010) method to estimate Lerner index as net operating income, divided by sales, i.e. PCM=(Sales–COGS–Selling expenses–Administrative expenses)/Sales. A higher value of PCM indicates more product pricing power and a higher competitive advantage of a company. The authors also use Lerner index ranking (R_PCM) to measure the competitive advantage of a company in the industry. The authors sort PCM values in ascending order in each industry and divide into ten groups. Then, the authors assign a value from one to ten to each listed company within each group in each industry. A higher R_PCM value represents higher market power and higher competitive advantage of a company. Based on Simunic (1980) framework, the authors develop the following model to test the relationship between product market competition, competition advantage and audit fees: LNAFit=β0+β1 PMCit+β2 SIZEit+β3 INVit+β4 RECit+β5 GROWTHit+β6 PRELOSSit+β7 LEVit+β8 QUICKit+β9 OPINit+β10 IBIG4it+β11 DBIG10it+β12 SWITCHit+β13 LOCATEit+β14 STATEit+∑β YearDummies+εit.FindingsUsing a sample of 6,709 firm-year observations from the Chinese stock market for the period of 2007–2011, the authors find that the product market competition intensity has a negative impact on audit fees, which means that agency cost effect is dominant in audit pricing at industry level. In addition, a company’s competitive advantage in the industry has a significant and negative impact on audit fees, which means that business risk effect also plays a critical role in audit pricing of individual engagement. The findings indicate that, in determining audit fees, auditors in the emerging market of China consider both the competition intensity of their clients’ product market at the industry level and the competitive advantage of the specific clients within the industry.Originality/valueThe findings indicate that, in determining audit fees, auditors in the emerging market of China consider both the competition intensity of their clients’ product market at the industry level and the competitive advantage of the specific clients within the industry.

Corporate payouts in dual classes

Purpose The purpose of this paper is to examine the dividend payments and share repurchases of dual-class firms that have both their superior voting shares and inferior voting shares publicly traded. Design/methodology/approach This paper uses matched dual-class and single-class samples from 1994 to 2015 and logit models to evaluate the likelihoods of dividend payment and share repurchase between dual-class firms and single-class firms. Findings The results show that dual-class firms are more likely than the matched sample of single-class firms to pay dividends in both share classes. Dual-class firms, however, are more likely to repurchase their superior shares than single-class firms and their inferior shares. Research limitations/implications The results suggest that dual-class firms do not use corporate payouts to either mitigate agency problems or maintain the private benefits of control. Instead, dual-class firms use dividend payments to mitigate agency problems while using repurchases of superior shares to maintain the private benefits of control, which supports the agency payout hypothesis. Practical implications This paper highlights the differences between dividend payments and share repurchases as forms of corporate payouts and suggests that firms may choose a particular form for a particular purpose. Originality/value This paper provides the first piece of empirical evidence on the corporate payouts of dual-class firms separating their superior voting shares and inferior voting shares.

Fatores determinantes da política de dividendos das instituições financeiras brasileiras

Este artigo busca identificar os fatores determinantes da política de dividendos das instituições financeiras brasileiras, em uma amostra composta por bancos comerciais e bancos múltiplos com carteira comercial, listados na B3 no período de 2000 a 2017, totalizando 245 observações, utilizando dados em painel com efeitos fixos. Os resultados indicam que os fatores determinantes da política de dividendos são: Retorno sobre o Patrimônio Líquido, com efeito negativo e Concentração do Controle Acionário, com efeito positivo no payout. Os resultados indicam também uma preocupação com o efeito sinalizador dos dividendos e o papel dos dividendos em mitigar os problemas de agência.

Is There Safety in Numbers? Organizing as a Cooperative in the Freelance Economy

Freelance work is becoming increasingly ubiquitous and pervasive across multiple sectors of the economy. Freelancers are especially vulnerable to hazards of opportunism, and lack the protections traditional workers typically enjoy. In the current study, we enquire whether organizing as a cooperative can aid freelancers in overcoming the challenges they face. To address this question, we conduct a single in-depth case study. We selected Magnum Photos, an exclusive freelancer cooperative agency, founded in 1947 to further the interests of its members. We find that the agency adopted a novel organizational cooperative form we entitle entrepreneurial club, in which the members, who are carefully screened and selected, retain individual property and decision rights. This novel form served to mitigate agency problems, facilitate innovation, reduce transaction costs of exchange, and ultimately contributed to changing the established rules of the game in the field of photojournalism. Currently, Magnum is considered to be a flagship organization in the profession, although the exponential increase in size has led to recent organizational changes. Predicated on our analysis, we suggest that organizing as a cooperative along the above espoused parameters is more beneficial for freelancers than following an atomized approach.

The impact of board secretaries’ excess compensation on corporate disclosure quality

Purpose Extensively public concern on “Huge Executive Compensation” makes it urgent to investigate the reasonability of high executive compensation. The purpose of this paper is to explore the effectiveness of compensation contracting based on the specific responsibility of executives. More specifically, this paper is to examine whether high compensation is helpful to mitigate agency problems. Design/methodology/approach Considering that board secretaries of listed companies are responsible for information disclosure in China, this paper examines the effect of board secretaries’ excess compensation on firms’ disclosure quality using listed company data from 2007 to 2015. The first measure of disclosure quality is based on the disclosure violation behavior of firms, and the second is KV value that represents the extent to which the investors relay on the stock trading volume. To provide additional confidence that the findings are robust, this paper further conducts two indirect tests based on rumors and cost of equity capital. Findings The results show that board secretaries’ excess compensation is negatively associated with the probability of information disclosure violation and also negatively associated with firms’ KV value, suggesting firms that pay high compensation to their information providers are more likely to provide high-quality disclosures. Besides, this paper further finds that board secretaries’ excess compensation is negatively related to the incidence of rumors, the number of rumors incurred or the cost of equity capital. Research limitations/implications Overall, the findings provide support to the efficient contracting of executive compensation, which implies that highly paid board secretaries would be better information providers than those poorly paid. Practical implications This paper provides empirical evidence that firms’ disclosure quality can be improved by modifying the compensation contract of information providers. This may indicate a new way to improve the quality of disclosures, so as to mitigate the agency problem. Social implications In spite of the public criticism on executive excess compensation, the high compensation is not always a signal of manipulation, collusion and self-interest. It also can be a signal of individual talents and great efforts. Board secretaries are worth to be highly paid if they can improve firms’ disclosures, thereby reducing the incidence of rumors and reducing the cost of equity capital. Originality/value This paper is the first research to examine the effectiveness of compensation contracting based on information providers’ disclosure responsibility in the Chinese context. It documents a positive relation between board secretaries’ excess compensation and corporate disclosure quality.

The Impact of Corporate Governance Mechanisms on the Relationship Between Cash Holdings and Audit Fees in Egyptian Listed Companies

This paper explores the impact of corporate governance mechanisms on the nature of the relationship between cash holdings and audit fees, which helps provide an opportunity to identify whether these mechanisms enable to mitigate agency problems, and thus lower audit fees through a sample of 78 Egyptian listed firms in EGX 100 during the period 2014-2016 using panel data analysis. Results indicated that cash holding increases auditing fees. The board characteristics affect negatively on the relationship between cash holdings and audit fees. Also, ownership structure affects negatively on the relationship between cash holdings and audit fees. As well audit committee affects negatively on the relationship between cash holdings and audit fees. There results support the view that corporate governance mitigate on the relationship between cash holdings and audit fees.

Regulatory Dualism as an Alternative Trust‐Enhancing Mechanism for Dividends and Debt: Evidence from Brazil*

AbstractWe test whether a market‐level corporate governance reform in Brazil influences the behavior of firms. To do so, we first verify whether the Novo Mercado (NM)—the segment applying more stringent corporate governance practices—impacts specific firms’ financial characteristics. We also investigate if it impacts firms’ dividends and leverage, two well‐known mechanisms for mitigating agency problems. Results show the NM impacts many firms’ characteristics and reduces firms’ dividends and leverage. We thus claim that market‐level reform may be an effective trust‐enhancing mechanism and may improve minority investor protection, thus providing evidence that a country's institutional setting can evolve over time.

Does Confucianism Reduce Corporate Over‐Investment? Evidence from China

AbstractIn this study, we argue that Confucianism, as an informal institution, mitigates agency problems and thus curbs managerial over‐investment behavior. Using a sample of Chinese listed firms over the period 2000 to 2015, we find strong evidence that Confucianism is negatively associated with over‐investment. Furthermore, we document that the negative association between Confucianism and over‐investment is weaker for state‐owned enterprises than for non‐state‐owned enterprises. Overall, the findings enrich our understanding that informal institutions can play a significant role in influencing corporate behavior.

Do Corporate General Counsels Mitigate Agency Problems? Evidence from Dividend Policy Decisions

We find that firms with a corporate general counsel in top management (TMC) are less likely to pay dividends, and for such firms that do pay dividends, the dividend payouts are lower. Our results hold addressing both endogeneity concerns and selection biases. We also find that the presence of a TMC will reduce the potential for overinvestment and that firms with TMCs invest less in CAPEX than firms without TMCs when there is a tendency to overinvest. Further, we find that firms with TMCs have a higher propensity to pay a dividend or have a higher payout ratio than firms without TMCs where there is the highest likelihood of agency costs deriving from overinvestment problems. Overall, our findings support the important role of the presence of a TMC as an effective corporate governance mechanism as evidenced by dividend decisions.

Does social capital mitigate agency problems? Evidence from Chief Executive Officer (CEO) compensation

We find that social capital, as captured by secular norms and social networks surrounding corporate headquarters, is negatively associated with levels of CEO compensation. This relation holds in a range of robustness tests including those that address omitted variable bias and reverse causality. Additionally, social capital reduces the likelihood that firms make opportunistic option grant awards that unduly favor CEOs, including lucky awards, backdated awards, and unscheduled awards. Social capital also lessens the accretive effect of CEO power on CEO compensation. These findings indicate that social capital mitigates agency problems by restraining managerial rent extraction in CEO compensation.

Mitigation of Moral Hazard and Adverse Selection in Venture Capital Financing: The Influence of the Country’s Institutional Setting

A venture capitalist (VC) needs to trade off benefits and costs when attempting to mitigate agency problems in their investor-investee relationship. We argue that signals of ventures complement the VC’s capacity to screen and conduct a due diligence during the pre-investment phase, but its attractiveness may diminish in institutional settings supporting greater transparency. Similarly, whereas a VC may opt for contractual covenants to curb potential opportunism by ventures in the post-investment phase, this may only be effective in settings supportive of shareholder rights enforcement. Using an international sample of VC contracts, our study finds broad support for these conjectures. It delineates theoretical and practical implications for how investors can best deploy their capital in different institutional settings whilst nurturing their relationships with entrepreneurs.

Internal Governance Mechanisms: Evidence from Islamic Banks

The impact of institutional corporate governance on the financial performance of Islamic banks, with a specific focus on Shari’ah Supervisory Boards and corporate boards. The findings of this study indicate that Islamic banks with Shari’ah Supervisory Boards outperform Islamic banks without such boards, as measured by return on assets (ROA), return on equity (ROE), asset growth (AG), and interest margins (IM). Further findings of this study indicate that the financial performances of Islamic banks with Shari’ah Supervisory Boards and corporate boards are influenced by several board characteristics, including the size of the board and the education of the board members. Moreover, Shari’ah Supervisory Boards provide tighter monitoring and control, as well as more advising and counseling, as compared with Islamic banks without Shari’ah Supervisory Boards. Later findings indicate that Shari’ah Supervisory Boards’ affiliations with international Islamic financial institutions motivate the positive relationship between the Shari’ah Supervisory Boards and Islamic bank performance. Overall, this study provides strong evidence that Shari’ah Supervisory Boards benefit shareholders by complementing corporate boards and thus mitigating agency problems and agency costs.

Dividends and Economic Policy Uncertainty: International Evidence

We provide the first international evidence on the impact of economic policy uncertainty (EPU) on dividend policy. Using data from 19 countries, we find that a high level of EPU is positively associated with dividend payout. This evidence is robust to using alternative dividend payout measures, to controlling for other sources of uncertainty, and to addressing endogeneity. We further find that the effect of EPU on dividend policy is moderated by firms’ free cash flows and governance quality, and by the quality of country-level indicators of shareholder protection, disclosure, enforcement, and creditor protection. Collectively, our novel evidence suggests that dividends help mitigate agency problems during high-EPU periods.

The effect of loan approval decentralization on microfinance institutions' outreach and loan portfolio quality

We study the impact of loan approval decentralization on MFI portfolio quality and outreach, and the effects of alignment mechanisms when loan officers combine information production and decision functions. Using an independently pooled cross-section of 374 MFI-year observations for 280 MFIs in 70 countries, we find that effective incentive schemes and internal control systems help mitigate agency problems within MFIs, and thus increase the outreach of MFIs without altering the quality of their loan portfolio. Our results are robust after controlling for alternative portfolio risk and outreach measures, outreach threshold effect, crisis period, selection bias and endogeneity.

Bond Covenants and Investment Policy

I provide evidence that covenants in bond indentures affect the firm's investment policy outside of covenant violations. Using a large dataset of public bonds, and controlling for the self-selectivity of covenant inclusion, I find that bonds with investment (financing) restrictions are associated with a decrease (increase) in investment in the two years following the issue. The effect of investment restrictions is entirely driven by firms that are more financially constrained. Both financially constrained and unconstrained firms have significantly higher investment spending after issuing a bond with financing restrictions, although the magnitude of the effect is higher in the latter group. These findings suggest that while bond covenants can help mitigate agency problems and reduce the cost of debt, they may also have externalities that lead to more investment distortions in firms that are closer to financial distress. This paper is the first to document a positive relationship between a covenant restriction and ex-post investment.

Zodiac Compatibility Between Chairmen and CEOs and Its Impacts on Corporate Philanthropy in SOEs

Separating the chairman and CEO positions is a common requirement for mitigating agency problems in Chinese state-owned enterprises (SOEs), but Western policies often do not function well in Easter...

When does competition mitigate agency problems?

This paper examines how the performance correlation of firms in an industry affects the degree to which product market competition mitigates agency problems. Consistent with theory, I find that in industries with high firm performance correlation, product market competition reduces the adverse effect of business combination (BC) laws on firm operating performance, while in industries with low performance correlation competition does not have such an effect. My results are robust to (i) the use of different measures of performance correlation, competition, and operating performance; (ii) excluding firms that are not exogenously affected by BC laws, (iii) dropping the years that are affected by the first-generation state antitakeover laws. I find similar results for stock prices when examining the stock market reactions to the first newspaper reports of BC laws. Overall, the disciplining effect of competition depends positively on an industry's performance correlation.

Vote Avoidance and Shareholder Voting in Mergers and Acquisitions

We examine whether, how, and why acquirer shareholder voting matters. We show that acquirers with low institutional ownership, high deal risk, and high agency costs are more likely to bypass shareholder voting. Such acquirers have lower announcement returns and make higher offers than those who do not. To avoid a shareholder vote, acquirers increase equity issuance and cut payouts to raise the portion of cash in mixed-payment deals. Employing a regression discontinuity design, we show a positive effect on acquirer announcement returns concentrated in acquirers with higher institutional ownership. We conclude that shareholder voting mitigates agency problems in corporate acquisitions. Received April 18, 2017; editorial decision February 9, 2018 by Editor David Denis. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Does Hotel Ownership Structure Influence Capital Expenditures?

The purpose of this article was to provide an understanding of the ownership effect on firm investment in the hotel industry. Specifically, a linear relationship between institutional ownership and firm investment was investigated, while a nonlinear relationship between managerial ownership and firm investment was tested based on the convergence of interest and managerial entrenchment hypotheses. This study used two-stage least square (2SLS) regression for the model estimation because an endogenous relationship was suspected between managerial ownership and firm investment. The results of this study confirmed a positive relationship between institutional ownership and firm investment and an inverted U-shaped relationship between managerial ownership and firm investment with a maxima of 17.34%. The results of this study imply that firm investment is dependent on ownership structure. Furthermore, current shareholders should consider granting a stock ownership to managers up to 17.34% to encourage them to act in shareholders’ best interest while avoiding additional issues associated with high managerial ownership. The findings of this study provided empirical evidence that conventional short-term institutional investors hold a long-term perspective when investing in hotel firms, and managerial ownership is an effective measure to mitigate agency problems. Theoretically, this study provided empirical evidence that firm ownership has a causal effect on firm investment in the hotel industry. This finding is expected to expand our understanding of the corporate governance effect on firm behavior. Furthermore, this study confirmed the use of 2SLS regression in the presence of an endogenous relationship between firm ownership and investment.

The Role of Trust as an Informal Mechanism in the Management Control System of Performance Effectiveness

Performance is a variable explaining the effectiveness of internal control systems that managed based on management accounting information and functions. There are some aspects of behavior that remain unexplained in understanding the effectiveness of the performance of organizations and individuals affected by the data and accounting functions. In addition, social mechanisms such as culture, honesty, group identification and trust play an important role in mitigating agency problems. This study aims to investigate what and how the role of trust in organizational performance is. It develops and tests a conceptual relation model between trust and performance through organizational commitment and job satisfaction. It also examines contextual factors in the form of cognitive orientation of the conceptual model that has been built. The data were collected by using questionnaire-based survey method for the employees based on the criteria of having direct supervisors and directly responsible for them, and a minimum work period of one year. They were analyzed using SEM PLS. It shows that organizational commitment mediates the positive relationship between trust and job satisfaction. The positive relationship between trust and performance is mediated by organizational commitment and job satisfaction. It also shows that cognitive orientation influences the relationship between job satisfaction and performance. This study contributes to the management accounting literature, that is, a conceptual relationship model of trust to performance in the realm of empirical research