Principal-agent Conflicts Research Articles

Controlling shareholders, their incentives and corporate governance ratings

PurposeThis study aims to facilitate the development of a better understanding of how controlling shareholders respond to the mandatory system of corporate governance rating (CGR) for all firms listed on Taiwanese stock markets and the incentives of controllers to apply corporate governance best practices.Design/methodology/approachUsing CGR data for all Taiwanese listed firms from 2014 to 2020, this study examines whether controlling shareholders determine a firm’s CGR.FindingsSingle-family-controlled firms have the lowest CGRs, and management-controlled firms have the highest ratings. Blockholder-controlled firms are more likely to have top 20% ratings than single-family-controlled firms and bottom 20% ratings than single-family and management-controlled firms. All three categories of firms have unfavorable (favorable) ratings because of substitute governance effects (signaling effects).Originality/valueManagement-controlled firms, in which agency problems refer to principal-agent conflicts, are more likely to have good ratings than single-family controlled firms, in which agency problems refer to principal-principal conflicts. Blockholder-controlled firms have extreme ratings, suggesting that multiple large shareholders develop corporate governance practices consistent with their best interests to increase firm value or expropriate wealth. Low cash flow rights and high control-ownership divergence lead firms to adopt additional governance arrangement(s) to make shareholders trust firms with capital and signal to shareholders that they can trust them with their capital.

Equity ownership concentration and firm growth: the moderating role of industry growth

PurposeThe effects of ownership concentration on firm performance usually considers two conflicting perspectives: monitoring and expropriation hypotheses. Past studies have produced mix findings. This study aims to shed light on this relationship by focusing on a specific measure of firm performance, firm growth. The moderating effect of industry growth in the aforementioned relationship is also considered, which advances knowledge on the role of moderators.Design/methodology/approachThis study resorts to data from a sample of 21,476 Portuguese firms, which is examined using hierarchical linear modelling. This approach is adequate because the data has a hierarchical structure: the firms are nested within industries.FindingsThe results show that equity ownership concentration has a positive effect on firms’ growth and that industry growth amplifies this relationship. Ownership concentration can spur effective monitoring, thereby alleviating principal–agent conflicts of interest and speeding up decision-making, enabling timely competitive actions that promote growth.Research limitations/implicationsThe research conceives ownership structure in two groups. However, equity ownership concentration often acquires more complex shapes. In addition, the data used is from a single country.Practical implicationsThe results show that firms pursuing growing strategies and operating in growing industries benefit from equity concentration.Originality/valueDifferent from past studies, this study focuses on firm growth performance and considers the moderating effect of industry growth.

The role of principal-agent in corporate financialization and green innovation

This paper explores the relationship between corporate financialization and green innovation with a sample of A-share listed companies in China from 2012 to 2022. It is found that the crowding-out effect of corporate financialization on green innovation is greater than the reservoir effect, thus inhibiting green innovation. However, internal control capability and equity incentives can alleviate principal-agent conflicts and prompt corporate managers to reduce the negative impacts of financialization on green innovation in the long run, further revealing the decision-making process of how corporate managers weigh short-term financial interests against long-term innovation development.

Analyst coverage and manufacturing enterprise green transition: An empirical study based on Chinese enterprises.

This study used the entropy weight method to develop an index of green transition and empirically examined the influence of analyst coverage on green transitions by manufacturing enterprises in China. We examined A-share listed manufacturing firms from 2010-2020, using patent data, media reports from Chinese Research Data Services, and other data from the Cathay Capital Database. After excluding cases with missing data, our final sample comprised 16,576 observations. The following conclusions were drawn. First, analyst coverage significantly contributed to green transition. Second, the analysis of the impact mechanism showed that improving information transparency, weakening principal-agent conflict, and increasing environmental legitimacy pressure are the paths through which analyst coverage affects manufacturing's corporate green transition. Third, the effect of analyst coverage was stronger for large-scale and state-owned manufacturing companies.

Board independence, CEO tenure, and private firm performance in Nairobi, Kenya

Governing board members includes a mix of non-executive and executive members who seek the best interests of shareholders. Non-executive board members relay on independence to execute their responsibilities and enables better firms’ performance. The independent board members are vetted in by shareholders to reduce agency problems. The study aims to establish how Chief executive officer tenure influence independent board members on decision making to enhance firm performance. Agency theory and stewardship theory were utilized in the study. The explanatory research design was used 371 private firms were the sample size. Data was collected using structured questionnaires. Hierarchical multiple regression models were used to test for direct effect and moderation effect. According to the findings, board member independence is critical for monitoring the CEO and reducing principal-agent conflict, hence enhancing business performance. The independence of board members is critical for organizations to remain inventive and competitive in order to improve firm performance.

International oil price uncertainty and enterprise investment efficiency: An empirical research of listed companies in China.

This article investigates the effect of international oil price uncertainty on investment efficiency using quarterly data of Chinese A-share listed companies from 2011 to 2020. It is discovered that uncertainty about oil prices increases principal-agent conflicts and information asymmetry in enterprises, leads to more inefficient investment, and ultimately lowers firms' investment efficiency. Furthermore, China's unique property rights foundation, firm size, and life cycle limit the aforementioned consequences. Additional investigation reveals that by raising companies' cash reserves, oil price uncertainty exacerbates overinvestment behavior. The study presented in this article can serve as a guide for businesses looking to make the best decisions in the context of volatile global oil prices and support their long-term, stable development.

Bond Issuance as Reputational Signal: Debunking the Negative Perception of Additional Liability

This paper examines the determinants of bond issuance in the Chinese market and the influence of capital structure—in particular direct debt finance—on firm performance and the cost of debt. The results reveal that institutional factors in the Chinese market, in particular the involvement of the financial authority permission process during bond issuance, enhance the credibility of firms that are able to successfully issue bonds. Empirical analysis of Chinese listed manufacturing firms over the period from 2010 to 2021 demonstrates that firms with higher outstanding levels of bonds perform better and face lower costs of both bond and nonbond direct finance. We interpret this as bond issuance approval serving as a signal to markets of an implicit government guarantee on firms that are approved to issue bonds. The agency problem is analyzed using propensity-score matching and Logit analysis, revealing a trade-off between the principal–agent conflict and conflicts of interest among different shareholders when power is very concentrated through CEO duality: the CEO simultaneously serves as the chairman of the board. In large firms, as measured by total assets, the cost-reducing effect of the principal–agent problem being mitigated by CEO duality outweighs the agency costs arising from conflicts of interest between large and small shareholders, leading to an increased likelihood of successful bond issuance. However, in large firms, as measured by market capitalization, where share ownership is likely more diversified, this effect diminishes. In conclusion, this paper posits that policymakers ought to investigate strategies for granting preferential treatment to high-growth, small to mid-sized enterprises, enabling them to secure funding through direct debt financing.

Corporate governance and equity value: empirical evidence from Nigerian firms

PurposeThe purpose of this study is to examine the impact of selected corporate governance (CG) variables on the equity value multiple (EVM) of listed firms in Nigeria.Design/methodology/approachThe research used data obtained from 100 firms listed on the Nigerian Stock Exchange (NSE) from 2014 to 2018. A generalized method of moment was used to estimate the relationship, whereas principal component analysis was used to generate composite values of EVMs.FindingsFindings reveal a significant association between board size, board independence, board gender diversity, managerial shareholding, audit committee independence, disclosure of CG information and EVM at a 1% level of significance.Research limitations/implicationsThis study was limited to firms that disclosed information on CG and EVMs.Practical implicationsThese empirical findings lend support to agency theory, which suggests the use of various CG variables as a way of reducing principal-agent conflicts. It also lends support to resource dependency theory from a gender diversity perspective.Originality/valueThe study is a pioneering effort toward unlocking the relationship between some CG variables and the EVMs, focusing on firms listed on the NSE.

Managerial Ownership and Tax Avoidance of Listed Companies in Nigeria with Profitability as Mediating Variable

This paper examines the mediating effect of profitability on the relationship between managerial ownership and tax avoidance of listed companies in Nigeria. The study employed a correlational research design using data from the Nigeria Exchange Group (NGX) over the period of twelve years (2010-2021). Data was extracted from the annual report and accounts of the 121 out of 156 companies that were listed for the period. The data collected were analyzed using descriptive statistics, correlation and Structural Equation Modeling (SEM) were used as techniques for data analysis while Monte Carlo model was used to determine the level of significance of the indirect effects and the hypotheses formulated were tested. The study’s findings demonstrate that managerial ownership affects tax avoidance behavior and that the relationship between managerial ownership and tax avoidance is mediated by the level of profitability. Based on these findings, the study recommended that shareholders need to pay closer attention to corporate tax matters to verify that the business has complied with its tax duties accurately and completely. Also, to reduce the level of principal-agent conflicts and enhance tax avoidance by monitoring management activities, listed companies in Nigeria should encourage managerial shareholding because some directors do not have share in sampled companies. Furthermore, the findings could be employed to inform policy makers on effective managerial shareholding on tax avoidance among listed companies in Nigeria.

Exploring Moral Hazard and Adverse Selection in Profit Sharing Contract

Purpose: The aim of this study is to review relevant articles on the problem of adverse selection and moral hazard in profit-sharing contracts in Islamic Banks. Adverse selection and moral hazard problems are problems that occur in profit-sharing contracts, so they impact the low porti on of this contract financing compared to margin-based and fee-based contracts. Theoretical framework: The profit sharing contract in an Islamic bank has two potential problems, namely adverse selection and moral hazard that arise due to asymmetric information. Asymmetric information can occur due to limited information owned by Islamic banks as owners of funds (shahibul maal) regarding the business to be run by customers (mudharib). This asymmetric information mainly causes the agency problem. If an agent is negligent in making decisions with negative consequences and does not want to take responsibility for his actions, this can be classified as a moral hazard. Moral hazard can be in the form of self-interest, side effects, fraud, opportunism, and the behaviour of agents who commit willful mistakes, negligence and breach of contract. Meanwhile, adverse selection arises when the principal cannot observe the agent's characteristics because of asymmetric information before the contract is signed. Design/methodology/approach: The study uses a qualitative approach by reviewing previous articles relevant to the discussion. The study is aligned with the practices that occur in profit-sharing contracts. Furthermore, discussions are deepened through forum group discussions with experts and practitioners in Islamic banks. Findings: The results show that the conflicts in profit-sharing contracts include principal-agent conflicts and principal-principal conflicts due to adverse selection and moral hazards. The study results reveal that signalling and screening measures can be applied to overcome adverse selection problems while monitoring actions and switching to debt contracts can overcome moral hazard problems. Research, Practical & Social implication: The study has implications for Islamic banks to draw up a clear and complete profit-sharing contract with the mudharib to reduce the moral hazard committed by the mudharib. In this case, Islamic banks can also ask the mudharib to submit comprehensive financial reports regarding their financial performance. Islamic banks must also pay attention to signalling and screening efforts to prevent adverse selection. Originality/value: The value of the study provides a new literacy regarding the potential for agency conflict in the form of moral hazard and adverse selection that will be faced by Islamic banks when applying profit-sharing contracts with other parties as managers (mudharib).

Agency cost: Ownership structure and board composition — An empirical analysis

This study evaluates the ownership structure and board composition as an effective corporate governance mechanism to control agency costs. It uses pooled ordinary least squares (OLS) regression methodology on the annual panel data from 2010–2011 to 2021–2022 for 985 non-financial companies listed on the National Stock Exchange (NSE) of India, collected from the ProwessIQ database. Globally, agency costs have been measured mainly by two proxies: asset turnover ratio (ATR) and operating cost ratio (OPEX) whereas, this study has used two additional proxies: return on total assets (ROA) and interest coverage ratio (ICR). The study also takes into account the impact of all types of ownership holdings namely, promoters’, government, domestic and foreign institutional investors on the agency cost. It is observed that agency costs are significantly lower with both foreign and domestic institutional investor ownerships and it is inversely related to the number of independent directors, as well as the size of the board. The findings of this study, on the one hand, will be beneficial for the corporate houses in resolving the problem of principal-agent conflicts whereas, on the other side, it will help the policymakers in deciding the policies with respect to the composition of the board members and ownership structure.

Company Financial Strategy's Instituonalization: Theoretical Aspects

Under today’s conditions of exogenous and endogenous challenges for economic agents, the problem of ensuring value creation for stakeholders on a long-term horizon is becoming more acute. The lack of adequately formed institutions within Ukraine’s market infrastructure adds additional complexity to the task. The aim of this paper is to identify the features of an effective financial strategy institute in Ukraine. This paper examines issue of forming and further functioning of financial strategy institute at company, industry, and state level. The problems of Ukrainian corporate sector genesis in the context of the formation of market institutions are described. The effect of information asymmetry and principal-agent conflict on the process and results of value creation for stakeholders is highlighted. Ways to reduce the influence of the principal-agent conflict through institutionalization are proposed. Paper also considers financial strategy’s institutionalization as a factor influencing investors’ interest in the company is considered. It is noted that the existing incentive tools for the company’s managers are aimed at the short-term horizon. It is emphasized that the financial strategy’s institutionalization would contribute to overcoming excessive fixation on the company’s short-term results, instead, an adequate balance would be formed regarding short- and long-term priorities at the company level. Financial strategy institute’s placement in the company’s management architecture is defined. The conducted research may be useful for researchers in the field of corporate governance and corporate finance, private and state- owned companies, industry associations, and state authorities. Prospects for future research are an in-depth analysis of the financial strategy institute’s infrastructure, in particular, in terms of its quantitative analysis and evaluation.

Board characteristics and CEO turnover–performance relationship: evidence from India

Purpose This paper aims to investigate the impact of board characteristics on CEO turnover performance relationship (TPR) in Indian listed firms. Design/methodology/approach A subset of the Standard and Poor’s Bombay Stock Exchange 500 (S&P BSE 500) Index companies was analyzed over the period 2015–2019 using the logistic (fixed-effects) regression model. Findings It was found that a weak relationship exists between CEO turnover and firm performance. With respect to board characteristics, board size was found to have a significant role in strengthening the TPR. However, other characteristics, such as board independence, multiple directors, board meetings and board gender diversity, played no role in influencing the TPR. Research limitations/implications First, the study period is limited to five years, during which several sample firms did not face any CEO turnover event leading to small sample size. Second, this study considers only the board’s gender diversity, whereas other types of diversity are omitted. Third, this study does not differentiate between insider and professional CEOs. Practical implications The findings suggest that regulators should focus on the effective enforcement of laws to strengthen the TPR and improve the monitoring role of boards, particularly in emerging economies like India, which face type II agency problems in addition to traditional principal–agent conflict. The results also offer implications for corporations, investors and academic researchers, highlighting areas that need considerable attention pertaining to corporate governance. Originality/value This study discerns the impact of several board-related characteristics on the TPR, particularly after the introduction of the new Companies Act 2013 in the emerging economy of India, where it has not been explored extensively.

Are blockchain-based digital transformation and ecosystem-based business models mutually reinforcing? The principal-agent conflict perspective

This paper explores the implications of digitalization and business model innovation for the principal-agent conflict. Continuous digital transformation has recently become a feature sine qua non for companies. It is also stimulating business model innovation resulting in the growing adoption of ecosystem-based models. These trends may have significant implications for the principal-agent relationship, essential for understanding value creation by a firm. In order to analyze the impact of digital transformation, we use blockchain technology as a proxy. To measure the potential impact on the principal-agent conflict, we study management and shareholder-sponsored proposals at annual meetings. The level of shareholder involvement in governance is measured based on the number of shareholder-sponsored proposals received. In addition, we measure shareholder support for management-sponsored proposals. A sample of 2481 NYSE, Nasdaq and AMEX-traded firms for the period 2015–2019 is used. First of all, we show that digitalization per se has a mitigating impact on the agency conflict. Shareholders become more active, albeit not more hostile towards management. Secondly, we have identified the strongest impact in such sectors as information technology, communications, finance, and healthcare. These are the most significantly impacted by ecosystem-based business model innovation. We conclude that digitalization and ecosystem-based business models are mutually reinforcing in mitigating the principal-agent conflict.

The principal–agent problem amid digital transformation

Despite the widespread use of digital technologies, the economic nature and essence of digital transformation remain understudied. The article examines the aspects of the principal–agent problem amid digital transformation, which implies replacing a person or analogue machines with digital technologies. Transformation is needed to gain additional economic advantages or improve the flexibility of the organization’s activities within the concept of Industry 4.0. The research demonstrates that the underlying economic reason for digital transformation is to solve the problem of information asymmetry and overcome the principal–agent conflict through the use of digital technologies. The concept of digital transformation and the principles of the principal–agent theory constitute the methodological basis of the study. Among the research methods were generalization, the inductive method of knowledge formation, and the assessment of the conclusions’ completeness with the involvement of theorists and practitioners in the field under consideration. The study allowed broadening the understanding of the principal–agent theory: establishing the roles of a human agent and a machine agent, as well as highlighting the essential economic aspects of digital transformation. The results obtained can be used to create digital transformation methodologies and research on the organization of labour in this field.

Dual-class stock structure and firm investment

Dual-class stock structure helps insiders gain control through different voting rights, but also exacerbates the principal-agent conflict. The separation of control rights and cash flow rights enhances managerial opportunistic behavior. We find that dual-class stock structure aggravates the over-investment behavior of listed firms. The impact of free cash flow on over-investment is more severe in dual class firms than in single-class firms. Paying cash dividends reduces the effects of dual-class stock structure, and separation of control and cash flow rights on overinvestment. Regulators need to strengthen the supervision to restrict managerial opportunistic behavior in firms with dual-class share structure.

Multi-Factor Collaborative Governance of Controlling Shareholder Expropriation Behavior in Emerging Economies: A Perspective of Double Principal-Agent Conflicts

Controlling shareholder expropriation is an important issue in corporate governance in emerging economies. The existing literature discusses the effects of minority shareholder legal protection, controlling shareholder ownership, and managerial shareholding on controlling shareholder expropriation, which is mainly empirical research with insufficient attention to the internal relationships among the governance factors. This research builds theoretical models to study the interactive mechanisms between minority shareholder legal protection, controlling shareholders’ initial shareholding ratios, managerial shareholding, controlling shareholder expropriation, and management effort. Furthermore, setting reasonable ranges for parameters, we use MATLAB to conduct numerical simulations and expand the detailed analyses to quantitatively reveal the degrees of influence of the governance factors. Our results show that controlling shareholder expropriation is negatively related to the degree of minority shareholder legal protection and controlling shareholders’ initial shareholding ratios, while the optimal managerial shareholding ratio is positively related to the degree of minority shareholder legal protection and controlling shareholders’ initial shareholding ratios. The findings enrich the literature on the governance of controlling shareholder expropriation and provide new approaches to and theoretical explanations for the governance of controlling shareholder expropriation toward sustainability in emerging economies.

Nexus of Employee Stock Ownership with Cost of Capital: Evidence from KSE 100

This study investigates the effect of employee stock ownership on a company's cost of capital. It takes employees into great consideration and tries to overcome the agency conflict that exists within the company by adopting the employee's stock ownership plan. The panel data regression is run in order to find out the effect of employee stock ownership on a company’s cost of capital. This study hypothesizes that employee stock ownership will tend to reduce the company's cost of capital, due to a decrease in the cost of equity and debt cost of the corporations. From KSE 100 companies were chosen for our research analysis, the study employs a sample size of 209 companies. 11 years of data were collected (2010-2020), a panel data regression was run due to cross sectional and time-series data. The research showed that there is a substantial impact of employees’ stock ownership on the company's cost of capital, equity cost, and company's debt cost, and a negative relationship exists between the independent and dependent variables. Employee stock ownership increases the company's cost of debt, equity cost and capital cost decreases. The research involves employee stock ownership as the variable because there are few research works yet been conducted especially in Pakistan. It also contributes towards the bond found between ESO and agency cost that how it helps to minimize the cost and benefits to the company and shareholders. This study offers a contribution towards the literature concerning ESO and the company’s capital cost. It is useful for the companies, as this shows that adopting the employee's stock ownership plan reduces the company’s capital cost, cost of debt, and equity as a whole, and most importantly the principal-agent conflict is minimized. The financial companies are fully ignored which may represent different results and may vary according to the sectors as well. The given effect can also be checked by taking stock prices as the dependent variable.

Posicionamento dos auditores sobre continuidade operacional em bancos em dificuldades financeiras

ABSTRACT This article aimed to identify factors that determine the auditor’s position in relation to the operational continuity of banks in financial distress. This research fills a gap in the national literature regarding the auditors’ position on operational continuity in the banking industry - a relationship subject to conflict between the premise of informing the user about operational continuity and the risk of a self-fulfilling prophecy. Understanding the context that explains the action of auditors in relation to going concerns in the banking industry is important for economic agents to comprehend whether and how auditing contributes to an environment of trust, credibility, and security in the financial market, considering that continuity risk warrants an opinion from the auditors, given their role of mitigating informational asymmetry and principal-agent conflicts. The research results contribute to the activities of market and professional regulatory bodies, of economic agents interested in financial disclosure, and of the auditors themselves for understanding and improving auditing work in banks. The methodology used was the identification of cases of financial distress in the Brazilian banking industry between 1990 and 2018 and logit model estimation to verify the determining factors of the position on operational continuity in these cases. The empirical tests showed that the auditor’s propensity to issue an opinion on the operational continuity of banks in financial distress is related to the importance of the client, to state control, to the application of NBC TA 570, and to the indicators of capital adequacy, asset quality, profitability, and liquidity. No relationship was confirmed with Big N auditors and capital of national origin.

The Effect of Formal Contracts, Transaction Cost, Agency Cost, Principal Agent Conflicts and Principal Agent Relationships on Village Funds Allocation in Facing the Covid 19 Crisis in Dolok Masihul District, Serdang Bedagai Regency

This study is related to the concept of public institution on principal agent relationship, namely the relationship between the Village Head and the Village Secretary in local government named Dolok Masihul. The number of villages studied were 44 respondents. Analysis statistical investigates relationship of research variable and using multiple regressions model. After analysing was known that formal contract had a significant positive effect on village funds allocation with value of 0.355. it means both head villager and secretaries had the competence and authority to carry it out, as Pascal (1997), Meinard (1997), Sarwoko (2010: 28) and Syofyan (2019). Hypothesis is accepted. Transaction costs have a negative effect and the hypothesis is rejected. Transaction costs refer to the governance structure as (Klein, 1999: 464-466), (Williamson, 1985). This result is different from the research by Syofyan (2019). Agency costs have coefficient value 0.072. It means agency cost significant to village funds. The hypothesis is accepted. Agency costs in this study are coaching and supervision that are positively related to the total allocation of village funds. This result is in line with Syofyan (2019).