Principal-agent Research Articles

ESG performance, heterogeneous creditors, and bond financing costs: Firm-level evidence

Exploiting credit spread to measure firm bond financing costs, this study explored the impact of environmental, social, and governance (ESG) performance on bond financing costs from the perspective of heterogeneous creditors. Our results revealed that national interbank bond market and qualified institutional investors are increasingly interested in aligning their capital with ESG-related investment opportunities. Thus, they require a low rate of return from firms with good ESG performance. In contrast, domestic legal and natural persons and ordinary institutional investors are unlikely to accept a low investment return in exchange for the positive impact of ESG. Additional robustness tests confirmed the results, including firm-fixed effects, variable substitution method, supplemental variable method, lagged variable approach, instrumental variable analysis, and propensity score matching. The results of mechanism analysis indicated that the bond cost reduction effect of ESG is achieved by improving firms’ information disclosure quality and reputation. In addition, because of trade-off theory and agency problems, the environmental and social factors of ESG have only a limited impact on bond cost reduction, whereas the governance factor markedly reduces bond costs.

Navigating Risk Aversion and Regret

This study investigates the distinctive modeling of regret utility when compared with common utility. I also introduce the interplay between common utility and regret utility. Using this model, I examine the differences in decision making, which encompasses issues such as risk sharing and principal–agent dilemmas. Regret utility is set so that its risk aversion shows common utility’s prudence (i.e., downside risk aversion). This paper reveals, both qualitatively and quantitively and with a concrete model, that regret utility leads to a more balanced and optimal ratio of agent payouts to outputs compared with common utility, meaning when major outputs are kept by principal, there are relatively larger agent payouts, and when major outputs are kept by the agent, there are relatively smaller agent payouts. This means that regret makes a more balanced distribution, and regret utility is more conservative (not biased). In addition, preliminary empirical research was performed in which people were asked risk preference or averseness questions, and their risk averseness was calculated by using the CRRA (Constant Relative Risk Aversion) utility function. The regret condition leads to a more conservative attitude. Furthermore, the regret model can be used in other areas, like in conservative investment portfolio optimization.

Evaluation of the effectiveness of implementing measures to preserve natural resources in the context of sustainable development

Performance evaluation helps to identify the most effective approaches to conserving natural resources, which helps to optimise costs and increase the efficiency of using financial and material resources. The purpose of this study was to assess the effectiveness of implementing measures to preserve natural resources in the context of sustainable development. The study employed the evaluation and sustainable development methods for a comprehensive assessment of the effectiveness of measures to preserve natural resources, considering economic, environmental, and social aspects. The research findings show that sustainable development is a critical concept for the modern world, as it ensures a balanced combination of economic growth, social well-being, and environmental sustainability. The performance measurement framework emphasises the significance of integrating different management systems, such as the balanced scorecard, value-based management principles, and integrated risk management (IRM). This integration enables effective risk management at all stages of project implementation, which provides a strategic focus on improving business performance and contributes to a greater probability of achieving sustainable development goals. The results of the study showed that a systematic approach to planning natural resource conservation measures is key to success. It includes eliminating differences in planning systems, detailing results through balanced scorecard projections, continuous monitoring of processes, and active staff involvement, which helps reduce agency conflicts. The results of the study can be used by environmental protection institutions to plan and implement effective measures to preserve natural resources, which will help achieve environmental goals at minimal cost

Pengaruh Remunerasi Direksi terhadap Nilai Perusahaan yang Dimediasi oleh Agency Cost pada Consumer Goods Industry yang Terdaftar di Bursa Efek Indonesia

This research aims to determine whether providing compensation to the board of directors can enhance the company's value. The theory utilized in this study is agency theory, which explores the relationship between owners and managers with a separation of power that leads to agency problems. The sample was collected using purposive sampling from companies in the consumer goods industry sector listed on the Indonesia Stock Exchange (BEI) during the period of 2019-2021. A total of 144 samples were examined using SmartPLS 3.0 to test the inner model and specific indirect effects. The structural model evaluation, known as the inner model, comprised tests for the determinant coefficient (R2), path coefficient, and hypothesis testing. The research model yielded an R2 value of 11%, indicating its weakness. The research concludes that compensation has a significant positive influence on company value, compensation has a significant negative impact on agency costs, agency costs have a significant negative effect on company value, and agency costs can mediate the relationship between compensation and company value.

Global Perspectives on Financial Policy Optimization: Addressing Overinvestment and its Impact on Corporate Profitability (Study on Indonesia Stock Exchange)

The primary objective of this research is to investigate the impact of overinvestment on corporate performance. It also seeks to analyze the effectiveness of debt policy, dividend policy, and the combined use of debt and dividend policy in alleviating the adverse effects of overinvestment on corporate performance. The study utilizes data from a sample of 53 non-financial companies that carried debt and consistently distributed dividends from 2010 to 2022. Overinvestment is assessed through two methods: the residual value derived from the new investment equation and the Hodrick-Prescott (HP) filter. The data is then transformed into panel data, and various models such as fixed effect, random effect, and common effect are applied to identify the most suitable model. The findings indicate a negative correlation between overinvestment and corporate performance. Debt policy emerges as a mitigating factor, addressing agency conflicts and reducing the adverse impact of overinvestment on company performance. Similarly, dividend policy proves effective in mitigating the negative effects of overinvestment by constraining excess cash. The combination of debt and dividend policies is identified as a comprehensive strategy to mitigate overinvestment, as it aids in curbing excessive free cash flow. However, it is noted that this combination also lowers financing funds to their minimum level, potentially leading to a shortage of funds for future profitable projects. Consequently, careful calculations are emphasized to ensure companies strike a balance, avoiding neglect of profitable investments in the future.

Managerial activism

We examine managerial activism through collective action in the corporate sector. Activist managers spend considerable resources in pursuing pro-business and pro-manager issues. While managerial activism is valuable in the pursuit of pro-business strategies, pro-manager agendas may exacerbate agency problems. Our evidence shows that firm performance improves with managerial activism through collective pro-business effort but is diminished by pro-manager activism. Furthermore, pro-business activism typically increases CEO compensation, whereas pro-manager activism decreases it. Firms that benefit most from collective managerial activism are those that are government dependent, have more intangible assets, or operate in industries with low competition. Overall, pro-business managerial activism adds value to firms, especially when information dissemination is more essential due to firm characteristics.

Generalist CEOs and stock price crash risk

AbstractWe investigate whether generalist chief executive officers (CEOs), that is, CEOs who gain transferable skills across firms and industries, have less incentive to hoard bad news. To address endogeneity concerns stemming from firm–CEO matching, we deploy a difference‐in‐differences method utilizing exogenous CEO turnovers, propensity score matching and entropy balancing matching methods, and Oster's coefficient stability test. Supporting our conjecture, we find a negative relation between CEOs’ general ability index (GAI) and future stock price crash risk. The effect of CEOs’ GAI on crash risk is stronger when labor demand is stronger and when firms have more agency conflicts. Our analysis further suggests that generalist CEOs attenuate crash risk by increasing conditional accounting conservatism and reducing real earnings management. Taken together, our findings highlight the role of CEOs’ general human capital in increasing their tolerance for failure and mitigating the agency problem.

Legal Analysis of Related Party Transactions in the BRICS Countries

Legal literature in the past has often debated whether concentrated corporate ownership (i.e. sizeable corporate conglomerates and corporate enterprises owned by business families or the government of a State) in a relatively close market leads to a high volume of related party transactions between the corporations in the respective market. The emerging economies attract substantial foreign investment due to the rapid growth of their markets and the presence of large publicly listed companies. Concentrated ownership structures in these countries tend to result in the expropriation of resources by controlling shareholders for their personal enrichment. There has been a high corporate failure rate due to related party transactions, despite the adoption of regulatory reforms that promote transparency, accountability, and fairness. Listed companies in the BRICS countries are marked by concentrated ownership structures controlled by either a family or the State. Although there are differences in ownership structures as well as indications of agency problems in the United States and the United Kingdom, the BRICS countries have adopted the same legal strategies to prevent unfair or abusive related party transactions in their respective countries, such as the appointment of independent directors, independent audit committees, CEO duality, and disclosure requirements. This study seeks to conduct cross-country comparative research to assess the ways in which the BRICS countries have regulated related party transactions. Each of the BRICS countries has adopted different monitoring mechanisms to prevent abusive related party transactions, which will be examined in the course of this research.

Towards novel blockchain decentralised autonomous organisation (DAO) led corporate governance framework

Decentralised autonomous organisation (DAO) powered by blockchain technologies has the potential to transform the organisational governance model with the foundations of algorithmic trust and democratic systems. DAO envisages a decentralised democratic organisation using software-based smart contracts to execute autonomous transactions with consensus among stakeholders. The study investigates the prospects of adopting DAO led corporate governance to manage agency (theory) problems in the light of institutional (theory) pressures. The paper depicts how algorithmic trust led corporate governance measures help any organisation follow policies, rules and regulations using DAO led corporate governance (DAOCG) framework. The authors mapped the constituents of agency theory, ethical decision-making, and institutional factors to propose the DAOCG framework. The DAOCG framework is assessed using a thematic analysis of 16 expert interviews with relevant experience from corporate governance and audit domains from varied industries across geographies. The research leveraged MAXQDA software to analyse interview transcripts and opinion codes. The framework helps to identify the core elements of DAO-led corporate governance (DAOCG) and provides the potential to study the theoretically sequenced practical constituents of corporate governance. The first-of-its-kind practical DAOCG framework can be used in the pursuits of digital transformation, business model innovation and social change.

Shareholding control, ownership concentration, and the value of the Brazilian firm

The study analyzes whether the type of shareholding control (dispersed, shared, or dominant) affects agency conflicts by investigating the relationship between shareholding control, ownership concentration, and firm value. The sample is a panel data comprising 1977 firm-year observations from 167 Brazilian firms in the period 2010–2022. Our results show that shared control creates value, whereas dominant control destroys firm value. Voting rights concentration and cash-flow rights reduce the value of firms with dispersed and shared control. However, at firms with dominant control, these firm characteristics increase firm value. Excess voting rights, in turn, destroy the value of firms with shared and dominant control. Our evidence shows that the type of shareholding control influences the nature and magnitude of agency conflicts and the relationship between ownership concentration and firm value. Thus, within an institutional environment, agency conflicts may differ among firms, depending on the type of shareholding control.

The Boundary Conditions of Optimal Contracting and Managerial Entrenchment: A Simultaneous Two-Equation Vector Autoregression with Exogenous Variables Approach for Chief Executive Officer Compensation and Firm Performance

We apply the vector autoregression with exogenous variables (VARX) approach to integrate the optimal contracting theory, the managerial entrenchment theory, the principal-agent theory, the contextual criteria theory, and the upper echelon theory. Based on this new approach, we discover two middle ground conditions between the boundary of managerial entrenchment and optimal contracting, where CEO non-entrenchment or entrenchment cannot be explained by the managerial entrenchment theory or optimal contracting theory alone. For example, some CEOs are not entrenched when the agency problem is not mitigated, while others are entrenched when the agency problem is mitigated. The results imply that merely mitigating the agency problem cannot prevent managerial entrenchment. However, not mitigating the agency problem at all leads to managerial entrenchment. We recommend the boards look at other non-financial means and social approaches (e.g., value- and culture-based trainings, performance recognition, goodwill and friendship building events, pay transparency increase, smooth flow of information among stakeholders, value-adding managerial investments, oversight committee) to minimize the impact of managerial entrenchment on both firm performance and CEO compensation. In addition, we recommend the boards take on the approaches unique to their own firms and their CEOs to address managerial entrenchment.

Fungi: friends or foes-an outreach science initiative for the collection of airborne fungal spores by high school students.

Fungi mostly reproduce through spores that are adapted for airborne dispersal; hence, fungal spores (and fungi) are found virtually everywhere. Fungi can be "friends or foes." Our friends include fungi used in the food and biotech industries, fungi that contribute to the cycling of carbon and nutrients, and those involved in the decontamination of polluted soils and/or water, to mention just a few examples. Many species, however, are foes-they are detrimental to plants, animals, and/or humans. Annually, >1.5 million people die due to invasive fungal infections. With the aim of enhancing microbiology literacy and the understanding of microbial concepts, we set up a project for the collection of airborne spores (the principal agent through which human airways are exposed to fungi). Students from five high schools in the Oeiras municipality partnered with us as citizen scientists; they carried out sampling by collecting fungal spores on adhesive stickers. The fungal spores collected by the students were subsequently processed in the schools and our research laboratory. Results obtained by the students themselves revealed a large variety of fungal species capable of growing in a rich medium at 30°C. In the research laboratory, using selective isolation conditions, 40 thermotolerant fungi were isolated, 32 of which were taxonomically identified as aspergilla, mostly from within the Aspergillus fumigatus taxa, yet exhibiting high genetic heterogeneity. The protocols and results were presented to the students, who were made aware of the local dispersal of airborne fungal spores, including some from potentially pathogenic fungi. Through carrying out scientific activities, the students developed both the interest and the self-confidence needed to implement future environmental investigations.

The value effect of sustainability: evidence from Latin American ESG bond market

ABSTRACT We use the event study methodology to examine the effect of 115 environmental, social, and governance (ESG) bond issuances on the stock price of Latin American listed firms over the period 2016–2022. Consistent with the signaling theory, firms sending a signal of commitment to sustainability obtain a positive and significant average Cumulative Abnormal Return (CAR) of 1.97% during an event window of 18 days. The CAR is higher for first-time issuers, reaching 2.28%. Firms with smaller and more diverse boards are associated with higher CARs. However, ownership concentration reduces the CARs due to the potential misbehavior and expropriation risk from controlling shareholders. These results suggest that firm-level corporate governance mechanisms are critical to the ESG bonds signaling effect. Overall, our findings indicate that investors in Latin American capital markets positively value the reduction of information asymmetries regarding firms’ sustainability efforts, especially in a firm that mitigates potential agency conflicts.

Peran Kebijakan Dividen dalam Tata Kelola Perusahaan yang Dikontrol oleh Keluarga

The research aims to examine how family company governance influences dividend policy in the context of minority shareholder protection in 345 observations of family companies listed on the Indonesia Stock Exchange (BEI) during the 2016-2020 period. The results of this research using panel regression (random effects model) show that family ownership concentration has a non-linear relationship to dividend policy, while the level of family involvement through the board of directors and board of commissioners has a statistically negative effect on dividend policy. However, the existence of independent commissioners and lender supervision do not have a significant effect on dividend policy. Overall, this research supports agency theory that family involvement in the company can give rise to agency conflicts with minority shareholders through dividend distribution.

Rise of the Machines: The Impact of Automated Underwriting

Using a randomized experiment in auto lending, we find that algorithmic underwriting outperforms the human underwriting process, resulting in 10.2% higher loan profits and 6.8% lower default rates. The human and machine underwriters show similar performance for low-risk, less complex loans. However, the performance of human underwritten loans largely declines for riskier and more complex loans, whereas the machine performance stays relatively stable across various risk dimensions and loan characteristics. The performance difference is more pronounced at underwriting thresholds with a high potential for agency conflict. These results are consistent with algorithmic underwriting mitigating agency conflicts and humans’ limited capacity for analyzing complex problems. This paper was accepted by Will Cong, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2024.4986 .

Ownership Structure and Financial Sustainability of Saudi Listed Firms

This research assesses the impact of ownership structure on financial sustainability. Panel data from 102 Saudi non-financial listed firms covering 2013 to 2022 were analysed using OLS and fixed effects methods. Further, the GMM was employed to check for robustness. The research outcomes reveal the strong and positive effects of institutional ownership and family shareholding on financial sustainability. This positive impact implies that robust and stringent monitoring of family shareholding and institutional investors may neutralise managerial entrenchment, reduce agency costs and pave the way for financial sustainability. However, government ownership appears insignificant, while managerial ownership exerts a strong negative influence on financial sustainability. The negative effect suggests that managerial shareholding may be counterproductive to organisational efficiency. Importantly, the outcomes look consistent using several econometric models. Therefore, the research findings may further shape policymakers’ understanding of how the diverse monitoring strategies of ownership structure influence financial sustainability. Also, the results may serve as an incentive for managers and standard setters to support firms in embracing institutional and family shareholding. The presence of these shareholders may minimise agency conflicts and maximise firm value for sustainable profitability.

Combatting bribery and corruption: does corporate anti-corruption commitment lead to more or less audit effort?

ABSTRACT Firms and their external auditors can both help to combat the international scourge of business-related bribery and corruption. However, previous empirical research has not investigated whether the two are related and, if so, how. This paper examines whether auditors reduce their own effort in response to firms’ anti-corruption policies and actions, or whether firms that are committed to combating corruption require their auditors to undertake more effort. Based on 2,012 firm-year observations of UK FTSE 350-listed nonfinancial firms over the period 2002–2016 and using audit fee as a proxy for audit effort, our results indicate a positive and significant association between audit fees and corporate anti-corruption commitment, suggesting that firms that have stronger anti-corruption commitment actively involve their auditors in their agenda. Further analysis finds that internal (managerial) and external (institutional) shareholdings negatively moderate the link, indicating their contribution as governance mechanisms to mitigate agency conflict and reduce audit risk, and therefore payment of lower audit fees. The findings are robust across several modelling specifications, different measures of variables, different subsamples and addressing possible endogeneity issues. Suggestions for further research are discussed, as are the implications for policy and practice, especially in relation to how firms and their auditors can complement each other’s contributions to the anti-corruption agenda.

Military independent directors and merger activity

AbstractIn this article, we examine the relation between independent directors with past military service and merger activity. We find that firms with a greater proportion of independent directors with military experience complete fewer mergers, and the deals are of smaller value. Our results are robust to instrumental variable estimation. The reduction in merger and acquisition activity is concentrated in firms with weak CEOs, suggesting independent directors with military service do not improve firm agency problems.

Comparison between beta-blockers and calcium channel blockers in patients with atrial fibrillation according to renal function.

Rate control is the most commonly employed first-line management strategy for atrial fibrillation (AF) in patients with chronic kidney disease (CKD). Principal agents used to control heart rate (HR) include beta-blockers (BB) and nondihydropyridine calcium channel blockers (ND-CCB). However, there is a paucity of published studies of the differences between those drugs in CKD patients. The present study aimed to investigate the differences, in terms of hospitalizations due to a poor HR control, in patients with AF under a rate-control strategy according to glomerular filtration rate (GFR). The study cohort included 2804 AF patients under rate-control regime (BB or ND-CCB) between January 2014 and April 2020. The end point, determined by competing risk regression, was hospitalizations for AF with rapid ventricular response (RVR), slow ventricular response (SVR), and need for pacemaker. On multivariate analysis, there were no statistical differences between ND-CCB and BB for subjects with GFR > 60 mL/min/1.73 m2 (subdistribution heart rate [sHR] 0.850, 95% confidence interval [CI]: 0.61-1.19; p = .442) and GFR 30-59 mL/min/1.73 m2 (sHR 1.242, 95% CI: 0.80-1.63; p = .333), while in patients with GFR < 30 mL/min/1.73 m2, ND-CCB therapy was associated with increased hospitalizations due to poor HR control (sHR 4.53, 95% CI: 1.19-17.18; p = .026). In patients with GFR ≥ 30 mL/min/1.73 m2, the choice of ND-CCB or BB had no impact on hospitalizations due to poor HR control, while in GFR < 30 mL/min/1.73 m2, a possible association was detected. The effects of these drugs on GFR < 30 mL/min/1.73 m2 would require further investigation.

Locus of control and the preference for agency

We conduct a laboratory experiment to study how locus of control operates through people’s preferences and beliefs to influence their decisions. Using the principal–agent setting of the delegation game, we test four key channels that conceptually link locus of control to decision-making: (i) preference for agency, (ii) optimism and (iii) confidence regarding the return to effort, and (iv) illusion of control. Knowing the return and cost of stated effort, principals either retain or delegate the right to make an investment decision that generates payoffs for themselves and their agents. Extending the game to the context in which the return to stated effort is unknown allows us to explicitly study the relationship between locus of control and beliefs about the return to effort. We find that internal locus of control is linked to the preference for agency, an effect that is driven by women. We find no evidence that locus of control influences optimism and confidence about the return to stated effort, or that it operates through an illusion of control.