Principal-agent Research Articles

Does corporate sustainability matter for the capital structure puzzle in OIC countries? Evidence from the COVID-19 pandemic

PurposeThis study assesses the impact of environmental, social and governance (ESG) certification on capital structure decisions considering the COVID-19 pandemic.Design/methodology/approachThe study utilizes the annual Asset-4 and Datastream data of Thomson Reuters Eikon for non-financial firms in member states of the Organization of Islamic Cooperation (OIC). Firm-fixed effects are used to avoid unobserved heterogeneity.FindingsFirms with higher corporate sustainability have a higher leverage ratio. The positive impact of ESG scores on book leverage became more significant during the COVID-19 pandemic. These findings imply that ESG activities might serve as a signalling tool, especially considering the pandemic: ESG activities mitigate financial constraints when they are most pronounced and impactful.Practical implicationsFirms should invest in ESG activities to alleviate financial constraints. Researchers and practitioners are encouraged to explore how ESG and macro-specific factors jointly affect debt financing. Policymakers should incentivize ESG investment to reduce agency conflicts. Regulators in OIC countries should support firms that are encountering obstacles in obtaining ESG certification.Originality/valueTo date, the role of ESG investing in capital structure policy by considering the recent pandemic has not been assessed in OIC countries.

Exploring the Link Between CEO Integrity and Investment Efficiency: New Evidence from Emerging South Africa

ABSTRACT This study detects an un-investigated ethical attribute of CEOs linked to investment efficiency – integrity. This study conjectures, drawing on the expectancy violation and self-regulation theories, that CEOs with high levels of integrity tend to understand the severity of stakeholders’ punishment for managerial misconduct and, therefore, self-regulate to avoid self-serving motives and align managerial and stakeholders’ interests leading to high investment efficiency. Using a sample of South African firms from 2015 to 2020, this study finds that CEO integrity significantly matters for investment efficiency and in reducing suboptimal investment strategies. The positive CEO integrity-investment efficiency nexus is pronounced in the presence of high corporate transparency, conservative managerial spending, low agency conflicts, and high board governance. The findings of this study remain valid to alternative measures, CEO characteristics, and endogeneity concerns. Taken together, this study extends the literature through empirical evidence that CEOs’ ethical and moral traits can reinforce investment efficiency.

Taxation and Corporate Governance

Legal and economic scholars have examined the intersection between corporate governance and taxation; however, recent legal scholarship has generally focused on the interplay between director compensation, management measures in the face of the market for corporate control, and the double taxation of inter-corporate dividends. Other aspects of the relationship between corporate governance and taxation have received limited attention. This article aims to fill this gap in the literature. First, this paper discusses the corporate agency problem and the existing justifications for the corporate tax. Second, this paper argues that the corporate tax can be justified on the ground that it mitigates the corporate agency problem more effectively and with fewer adverse consequences than alternative taxation systems.

The US Individualism–Collectivism and Labor Investment Efficiency

ABSTRACTResearch Question/IssueWe examine whether the variation in the ndividualism–collectivism dimension within the US affects labor investment efficiency.Research Findings/InsightsUsing the collectivism index developed by existing literature, we find that firms headquartered in collectivist states are more likely to deviate from the optimal level of hiring. The effect is stronger in firms with high agency problems and information asymmetry. Additional analyses suggest that collectivism induces more inefficiency in firms with larger boards, less independent boards, firms with high R&D intensity, and states that adopt antitakeover laws.Theoretical/Academic ImplicationsOverall, we find convincing evidence that cultural differences across US states contribute to labor investment decisions.Practitioner/Policy ImplicationsThe study extends the existing literature on the effect of cultural dimensions on labor investment decisions, particularly in the context of the United States. It also extends our understanding of how cultural variations across headquarters states can adversely affect firm hiring and firing decisions.Jel ClassificationM14, G30, G34, G40

Empowerment or ornament? Gender diversity’s impact on cash holdings amid quota enforcement in an emerging market

Purpose This study examines the impact of female directors on cash holdings in Egyptian listed firms, particularly in light of Decree 123/2019, which mandates female board representation. This study aims to determine if female directors mitigate agency conflicts related to cash holdings and how these dynamics shift post-quota implementation. Design/methodology/approach Using a panel fixed-effects model, the research analyzes 1,563 firm-year observations from 223 non-financial Egyptian firms listed on the EGX between 2014 and 2022. The robustness of the findings is tested through additional analyses using alternative proxies for cash holdings, different sample periods and a two-stage least squares approach to address endogeneity concerns. Findings This study finds a significant negative association between female directors and cash holdings, suggesting that female board members may promote more conservative cash management practices. However, this relationship weakens post-quota implementation, becoming statistically insignificant. This implies that while quotas increase female representation, they do not necessarily enhance corporate governance effectiveness regarding cash management. The pre-quota positive link between female directors and excess cash holdings also becomes insignificant post-quota. Research limitations/implications The study focuses on female directors’ impact on cash holdings, excluding potential effects on other board subcommittees or functions. It does not capture long-term benefits of increased female representation, which may emerge as the pool of qualified female directors grows. Future research should explore broader implications of gender diversity guidelines and other diversity dimensions across various corporate governance aspects and institutional contexts. Originality/value This research provides empirical evidence from an emerging market context on the understudied impact of gender diversity on cash holdings. It critically evaluates the unintended consequences of mandatory gender quotas, highlighting the complexity of regulatory interventions in corporate governance. The study stresses the need for policymakers to address factors limiting the effectiveness of such quotas and to consider potential suboptimal outcomes when increasing female board representation without a corresponding increase in the supply of qualified female directors.

CEO Inside Debt and Corporate Investment Efficiency

ABSTRACTThis paper investigates whether and how the chief executive officer (CEO)'s inside debt holding influences a firm's investment policy. Our evidence on a sample of US S&P 1500 firms indicates that CEO inside debt can significantly improve investment efficiency and help to overcome both over‐investment and under‐investment, suggesting that the CEO's higher positions of inside debt can lead to optimal investment decisions. The results are robust when we use PSM, entropy balancing, the Heckman two‐stage method and the lagged value of the independent variables to mitigate the endogeneity concerns and other robustness checks. Furthermore, we document that the effectiveness of the CEO inside debt on investment is not sensitive to agency problems, as well as financial constraints. Overall, we confirm the importance of investigating the effect of managerial inside debt holdings on corporate capital investment and provide new insights into how inside debt mitigates agency problems.

Supervision mechanism of integrated construction consultancy services in China: tripartite game analysis

PurposeMegaprojects contribute greatly to China’s socio-economic development. However, the diverse stakeholders of megaprojects tend to be prone to conflict and plunge the project into lower performance than expected. This study aims to investigate (1) the optimal supervision mechanism under direct supervision of the owner and (2) the optimal indirect supervision mechanism of the owner, with involvement of integrated construction consultancy (ICC) in supervision and considerations into the impact of collusion between the ICC and the general contractor on supervision efficiency.Design/methodology/approachThis study applies the principal–agent theory and game theory to design effective incentive and punishment mechanisms for direct and indirect supervision by the owner. Through the theoretical framework of game theory, it analyses the strategic interactions between the owner, the ICC and the general contractor, and evaluates the effectiveness of various supervision mechanisms based on Nash equilibrium theory.FindingsThe results showed adopting the direct supervision mechanism when the probability of the general contractor’s opportunistic behavior being detected was higher or the occurrence had a greater impact on the owner. However, the increase in supervision cost would reduce the motivation of owner’s direct supervision and prompt the owner to choose the indirect supervision mechanism. Additionally, the indirect supervision mechanism was more likely to inhibit the collusion between the ICC and the general contractor. Thus, increasing penalties for ICC would result in improved supervision of ICC, thereby improving the benefits to the owner.Originality/valueThis study examines the dynamic interaction between the owner, the general contractor and the ICC. The study establishes a game tree and game matrix based on principal–agent theory, and analyses direct and indirect supervision models to determine the Nash equilibrium and optimal supervision strategy that is in the best interest of the owner. The study advocates for improved management and supervision mechanisms and argues that tailored supervision mechanisms can significantly improve the performance of megaprojects, which is well validated in megaprojects in China.

Current Research Progress of ESG and Its Systematic Analysis from the Perspective of Economics

As global environmental, social and governance issues gradually become key factors for enterprise sustainable development and investment decision-making, the research progress of Environment, Social Responsibility and Governance (ESG) has received wide attention. This article will systematically summarize the existing ESG research based on the existing ESG research environment, society and governance, based on the existing research on ESG enterprise value, corporate performance and social responsibility, systematically summarize the existing ESG research, find problems in ESG research and propose solutions through summary. The construction of ESG system in accordance with economics is discussed, and the research found that, The ESG system provides new evaluation indicators and decision-making tools for enterprises and investors. By quantifying the performance of the environment, society and governance, ESG evaluation not only helps enterprises better internalize social costs, improve brand value and employee loyalty, but also alleviates information asymmetry and agency problems, and enhances the long-term risk resistance of enterprises. Based on the discussion of the ESG system in this article, it provides a program discussion to solve the problems in the current ESG research. At the same time, it provides more possibilities for better achieving the coordinated development of society, economy and the environment, and provides a feasibility plan for global sustainable development.

Balancing efficiency and fairness in an output-based agency relationship: an empirical investigation of the cognitive factors favouring a win–win situation

PurposeThis research aims to investigate whether, in a principal–agent relationship, personal characteristics of the agent (seniority, locus of control (LOC), self-efficacy (SE), risk appetite (RA)) have an impact on their performance, on costs for the principal and on organizational justice (distributive justice (DJ) especially) in a sample of insurance brokers.Design/methodology/approachThe adopted structural equation modeling (SEM) analysis highlights the different role that personal characteristics play in affecting or moderating the agent’s performance. Moreover, the mediation analysis highlights the role played by gender and tenure in moderating the relationship between personal characteristics and work outcomes.FindingsThe findings of this study suggest that an agency relationship is not based only on rational choices made by the principal and agent in their own self-interest, but also by other idiosyncratic factors that influence the outcome of the relationship.Research limitations/implicationsIn order to better understand the agent’s behaviour, agency relationship investigation should consider other psychological variables in addition to the traditionally considered risk orientation, uncertainty and information asymmetry.Practical implicationsThis study gives specific insights into preventing undesired behaviours, e.g. organizational withdrawal, opportunism, high staff/employee turnover, as advocated by current literature.Originality/valueBy systemically investigating and analysing personal characteristics of the agent such as LOC, agent’s SE and RA, this study provides an original contribution to the knowledge on the determinants of costs and effectiveness in the agency relationship.

Do foreign institutional investors curb carbon emissions? Evidence from an emerging economy

This study examines the effect of foreign institutional investors on corporate carbon emissions of Chinese listed firms from 2010 to 2019. Our findings support the monitoring view of foreign institutional ownership and find that foreign institutional investors have a negative effect on corporate carbon emissions. Our results remain robust to a battery of endogeneity tests, including the instrumental regression model, the Heckman selection model, and the PSM-DID (propensity score matching and difference-in-differences) method. Moreover, we find that foreign institutional investors from regions with strong green innovation exert a more substantial negative impact. Further analyses show that the negative effects are more significant for firms with agency problems and information asymmetry. Our research highlights the critical role that foreign institutional investors play in addressing environmental issues in emerging economies and provides valuable insights into this phenomenon.

A Machine Learning Method for Stackelberg Mean Field Games

We propose a single-level numerical approach to solve Stackelberg mean field game (MFG) problems. In the Stackelberg MFG, an infinite population of agents plays a noncooperative game and chooses their controls to optimize their individual objectives while interacting with the principal and other agents through the population distribution. The principal can influence the mean field Nash equilibrium at the population level through policies, and she optimizes her own objective, which depends on the population distribution. This leads to a bilevel problem between the principal and mean field of agents that cannot be solved using traditional methods for MFGs. We propose a reformulation of this problem as a single-level mean field optimal control problem through a penalization approach. We prove convergence of the reformulated problem to the original problem. We propose a machine learning method based on (feed-forward and recurrent) neural networks and illustrate it on several examples from the literature. We also give a modified example to show the scalability of the proposed method and show its efficiency by comparing its performance with an alternative bilevel approach.

Common institutional ownership and executive pay-performance sensitivity: Mediating role of information transparency and fund occupation

Research in corporate governance highlights the development of executive compensation contracts as a crucial strategy for mitigating agency conflicts. This study uses the pay-performance sensitivity (PPS) of executives as a metric to evaluate the effectiveness of compensation agreements, specifically examining the influence of common institutional ownership (CIO) with data from publicly traded companies between 2009 and 2022. The findings reveal the existence of PPS and its amplification through CIO, a conclusion that remains robust after conducting various tests. Moreover, the research identifies two mediating effects: information transparency and fund occupation. The co-governance role of CIO is found to be more pronounced in the eastern region, within state-owned enterprises, and in contexts characterized by higher agency costs and greater equity concentration. These insights deepen our understanding of the governance synergies associated with CIO, offering both theoretical and empirical foundations for the design of executive compensation contracts.

Share pledge and stock repurchase: The role of stock mispricing and corporate governance

Prior research documents a positive relation between controlling shareholders' share pledge and the probability of a stock repurchase announcement. This study investigates whether and how stock mispricing and corporate governance affect this relation. By extending the framework of Chan et al. (2018), we first show that the share pledge is not only positively related to the probability of stock repurchase but also proportionally related to the amount purchased. Moreover, for firms with shares pledged by controlling shareholders, stock overpricing and better firm-level corporate governance are associated with a lower probability of stock repurchase and less amount of stock repurchase. Additional tests show that large shareholders (not only the largest) facilitate stock repurchase once they have shares pledged. Our evidence supports the market timing theory and that better corporate governance moderates the agency problem between controlling and small shareholders.

Enhancing internal audit effectiveness: The role of management support in South African provincial governance

Despite anecdotal evidence indicating that a lack of management support towards internal audits (IAs) affects their efficacy, only a few studies have been conducted on the topic in a provincial government (PG) context. Besides, studies on the lack of management support towards IA efficacy lack theoretical grounding. This research aims to address this knowledge gap. The paper applied principal–agent theory to identify barriers to efficient management support towards the IA role within PGs, using the case of the Western Cape Government (WCG). Initially, questionnaires were sent to 260 WCG participants. The results revealed that management has a bad perception of IA as adding value to the organisation and does not take timely corrective actions based on audit findings and recommendations. The study adds to the limited knowledge about management and the IA relationship within PGs.

Labor investment efficiency: a review of the international literature

PurposeWe aim to provide a systematic literature review of the determinants and consequences of labor investment efficiency in an international context. First, we offer a theoretical discussion of labor investment efficiency, followed by an examination of its measurement. Next, we review the determinants of labor investment efficiency, categorizing them into firm fundamentals including financial reporting quality, governance and controls, corporate social responsibility/environmental regulation and macroeconomic determinants. Finally, we review the limited empirical literature on the consequences of labor investment efficiency. We also provide some suggestions for future research.Design/methodology/approachWe perform a systematic literature review using the Preferred Reporting Items for a Systematic Review of Meta-Analysis (PRISMA) guidelines to examine archival studies investigating the determinants and consequences of labor investment efficiency. Using a Boolean search strategy on the Scopus and PRISMA selection criteria, we review 86 published archival research articles from 2014 to the end of August 2024.FindingsOur review highlights that firm-level fundamental factors including financial reporting quality have profound implications for labor investment efficiency. Effective governance mechanisms also help mitigate agency conflicts and information asymmetries and alleviate labor investment inefficiencies. Furthermore, the influence of regulations including ESG-related regulations and macroeconomic factors play a crucial role in shaping labor investment decisions. We find very little research on the consequence of labor investment efficiency.Practical implicationsOur review has highlighted that well-functioning corporate governance tools are effective in mitigating inefficient labor investments. Stakeholders, therefore, should ensure that firms have effective internal governance mechanisms in place and that external governance regulations complement and where necessary act as substitutes for internal governance mechanisms to optimize labor investments.Originality/valueTo the best of our knowledge, this study represents the first systematic review of extant research on labor investment efficiency. Our review highlights some research gaps, particularly about the consequences of labor investment efficiency and offers some suggestions for future research.

Do Long-Term Institutional Shareholders Always Vote in Favour of Board Recommendations? The Moderating Effect of Cash Holdings

This article aims to examine the voting behaviour of long-term institutional shareholders towards board recommendations on management proposals and resolutions and how the potential agency costs could moderate such voting behaviour. This study is conducted using all corporate capital proposals put to vote by management during the annual general meetings (AGM) of publicly listed firms on the London Stock Exchange over a period of 17 years from 2000 to 2016. Building on agency theory and the concept of the monitoring function of institutional shareholders, this study finds that long-term institutional shareholders do support board recommendations on management proposals, but potential agency concerns linked to excess cash holding can negatively moderate this relationship. Additional analysis reveals that this moderating effect is observed only for management proposals related to cash inflows, specifically after the 2007–2009 financial crisis. This study highlights the importance of long-term institutional shareholders actively monitoring firms’ cash holdings and using voting to address agency concerns while advising corporate managers to optimise cash management and stay attuned to shareholder preferences. For policymakers, the research suggests promoting transparency in corporate governance and strengthening shareholder engagement to reduce agency problems and improve governance. Several robustness tests are conducted, and the results support our predictions.

Complementarity or substitution? The impact of the coexistence of corporate and independent venture capitalists on innovation in Chinese firms

ABSTRACT Research into corporate innovation generally focuses on the specific effects of corporate and independent venture capitalists (CVCs and IVCs). We explore whether CVCs and IVCs complement or substitute each other in innovative firms and how their interactions affect firm innovation, based on the notions of complementary assets and institutional logic. Using data from innovative firms listed in China, we find evidence of a complementary relationship between CVCs and IVCs and show that their coexistence significantly enhances firm innovation. Furthermore, our results show that the coexistence of government CVCs (GCVCs) and government IVCs (GIVCs) leads to better innovation performance, although their individual support also facilitates firm innovation. We also find that the coexistence of CVCs and IVCs contributes more to innovation in non-state-owned firms. Moreover, we find that their coexistence promotes firm innovation by mitigating agency problems. These findings contribute to a deeper understanding of the interactions between CVCs and IVCs.

Do agroholdings cope better with the agency problem? Empirical evidence from corporate farms in Russia

The agricultural industry in Russia demonstrated a notable growth since 2010. Russian policymakers strive to further increase agricultural production and set new targets for the industry for the years ahead. While agroholdings are regarded as one of the main driving forces behind the recent success in the agricultural sector, they are also believed to be the main locomotive that will move agriculture towards the set goals. In spite of their growing importance, the literature on agroholdings is still relatively immature and fails to provide clear evidence of their financial efficiency as opposed to non-agroholding farms. The current study utilizes a manually sourced longitudinal dataset of 203 corporate farms in Russia and provides a new empirical evidence on the financial performance of agroholding farms through the prism of an agency problem. Our findings reveal a significant positive relationship between agroholding membership and financial performance, as indicated by two accounting indicators – return on assets (ROA) and return on sales (ROS). We further observe that agroholdings face lower agency costs, which to a certain extent, explain their higher financial performance compared to stand-alone farms. The study offers empirical recommendations for policymakers and corporate executives in the Russian agricultural sector.

Eviews Analysis: Investigating the Relationship Tunneling Incentive, Leverage Ratio, and Hedging in Indonesian Stock Exchange-Listed Firms

Manufacturing companies carry out many operational activities, so the more activities carried out, the more problems will be faced, especially problems related to the company's finances. So that the company experiences less than the maximum profit. For this reason, accurate financial management is needed to record and measure manufacturing company costs and profits so that the financial problems that occur in these manufacturing companies can be prevented or minimized through appropriate financial and operational controls. The method utilized in this study is a causal relationship. From the research results obtained using Eviews12 for manufacturing, Tunneling Incentives, Leverage, and Hedging can increase company value. It can also be concluded that Tunneling Incentive, as measured by Distributed Ownership Structure, has no significant effect on Leverage and Hedging. In contrast, Tunneling Incentive, as measured by Concentrated Ownership Structure, has a positive and significant effect on Leverage and Hedging. The managerial implications of this research are how important tunneling is for companies. The emergence of tunneling is due to agency problems between majority and minority shareholders. By holding tunneling by the controlling shareholder, there will be no dividend payment so that the controlling shareholder benefits the minority shareholder.

Secret Innovation

Abstract Conventional wisdom holds that open, collaborative, and transparent organizations are innovative. But some of the most radical innovations—satellites, lithium-iodine batteries, the internet—were conceived by small, secretive teams in national security agencies. Are these organizations more innovative because of their secrecy, or in spite of it? We study a principal–agent model of public-sector innovation. We give research teams a secret option and a public option during the initial testing and prototyping phase. Secrecy helps advance high-risk, high-reward projects through the early phase via a cost-passing mechanism. In open institutions, managers will not approve pilot research into high-risk, high-reward ideas for fear of political costs. Researchers exploit secrecy to conduct pilot research at a higher personal cost to generate evidence that their project is viable and win their manager's approval. Contrary to standard principal–agent findings, we show that researchers may exploit secrecy even if their preferences are perfectly aligned with their manager's, and that managers do not monitor researchers even if monitoring is costless and perfect. We illustrate our theory with two cases from the early Cold War: the CIA's attempt to master mind control (MKULTRA) and the origins of the reconnaissance satellite (CORONA). We contribute to the political application of principal–agent theory and studies of national security innovation, emerging technologies, democratic oversight, the Sino–American technology debate, and great power competition.