Resolve Agency Conflicts Research Articles

Unlocking the power of roots: Local CEOs and corporate maturity mismatch

This paper investigates the impact of local CEOs on corporate maturity mismatch. We find that local CEOs can significantly mitigate the issue of corporate maturity mismatch, mostly by resolving agency conflicts, boosting information disclosure, and alleviating financial constraints. Furthermore, the positive impact of local CEOs is particularly pronounced in non-state-owned enterprises, growth stage firms, and innovative industries. Further analysis suggests that increasing equity financing capacity and combining industry and finance significantly improves the effect of local CEOs on maturity mismatch, whereas debt pressure from local governments crowds out bank financing space, significantly suppressing the role of local CEOs.

O voto remoto pode mitigar os problemas de agência?

ABSTRACT Purpose: Board members are critical in resolving agency conflicts. How- ever, many are unable to perform their function due to their distance, as they are not present at board meetings. As of Instruction no. 561, the Brazilian Securities and Exchange Commission (CVM) regulated remote voting for Boards of Directors, allowing for greater attendance at meet- ings and, as a result, increased involvement. In this context, this research examines the effect of remote voting by Boards of Directors on execu- tive compensation and financial performance of publicly traded firms in Brazil. Originality/value: This research is innovative in the sense that it exam- ines the effect of the Board of Directors remote voting on the CEO com- pensation and financial performance of the firm, using an innovative methodology. Design/methodology/approach: We applied a quasi-experimental method (difference-in-differences) to assess the effects of a given group (treat- ment) before and after the event, significantly reducing endogeneity when considering an exogenous shock to the system. Findings: As a result, the estimation of the main model reveals statisti- cally significant differences between the effects of treatment and control on profitability and executive remuneration, indicating that remote vot- ing mitigated agency problems by generating a substitution effect for explicit incentives (as evidenced by the decrease in executive remunera- tion) and by providing greater accounting performance for companies.

Corporate Cash Holdings and Share Buyback: Evidence from Emerging Markets

This study evaluates corporate cash holdings (CCHs) as a determinant of share buyback for three emerging economies, India, Malaysia, and South Korea, from 2002 to 2020. We find CCH as a significant determinant of share buyback for our sample nations. Our results suggest that share buyback is a flexible way for firms to distribute excess cash across our sample nations. Our study also documents the impact of different country-level investor protection frameworks on buybacks. A favorable relationship between a strong investor protection environment (good governance) and buyback explains the effective role of buyback in resolving agency conflicts compared to dividends. JEL Codes: C5, F3, G3

Absence of ultimate controller and investment efficiency: Evidence from China.

In modern enterprises with a separation of powers, the ultimate controller can effectively influence the implementation of corporate strategy and operational management efficiency, as well as improve corporate governance by monitoring and limiting the management entrenchment effect within enterprises. Based on the information pertaining to ultimate controllers disclosed by enterprises in their annual reports, this study empirically tested whether the absence of the ultimate controller impacts investment efficiency using the data of Chinese A-share listed companies from 2007 to 2020. It was found that the investment efficiency of enterprises without ultimate controllers is relatively lower than those with ultimate controllers. This is reflected in the insufficient investment of enterprises without an ultimate controller. Moreover, the effect is more significant when the financial environment, internal governance environment, and external governance environment of firms are worse. The mechanism analysis demonstrated that the absence of an ultimate controller causes a more severe insider agency problem and a significantly higher degree of financing constraints, which leads to underinvestment and reduces investment efficiency of firms. The economic consequence test also found that the inefficient investment caused by the absence of ultimate controllers would damage the future value of enterprises, but would increase managers' compensation. Overall, this study suggests that ultimate controllers are an important part of a firm's internal governance, especially for monitoring management behavior and resolving agency conflicts.

Contracting and Reporting Conservatism around a Change in Fiduciary Duties*

ABSTRACTWe exploit an influential 1991 Delaware court ruling to examine simultaneously two types of conservatism that play important roles in resolving creditor–owner agency conflicts: contracting conservatism and reporting conservatism. The ruling expanded managerial fiduciary duties in favor of creditors for Delaware‐incorporated firms in the vicinity of insolvency. In those firms, following the ruling, debt contracts are less likely to include conservative adjustments to accounting numbers used for covenant compliance (i.e., contracting conservatism decreases), while public financial reporting becomes more conservative (i.e., reporting conservatism increases). The decrease in contracting conservatism is concentrated in firms that exhibit a greater increase in reporting conservatism, suggesting that reporting conservatism is more cost‐effective in resolving agency conflicts. In addition, the substitution effect is more pronounced in firms facing greater business uncertainty and firms with greater board independence.

Moderating role of CEO compensation in lean innovation strategies of Chinese listed family firms

PurposeThe purpose of this paper is to examine the impact of Chinese listed family firms on lean innovation strategies. Additionally, the authors also examined the moderating role of CEO compensation on the family ownership and lean innovation strategies relationship.Design/methodology/approachData is obtained from CSMAR database about Chinese family firms listed at Shenzhen Stock Exchange and Shanghai Stock Exchange. Panel data comprising of firm year observations from 2007 to 2016 is analyzed using STATA.FindingsFamily firms are proactive towards research and development investment (innovation input) as well as towards patent applications (innovation output). Moreover, family firms show propensity towards patent applications and towards converting their R&D investment into granted patent applications. CEO compensation negatively moderates the nexus between family firms and lean innovation which seriously needs to be addressed to reduce agency costs.Research limitations/implicationsThe study has focused on Chinese market only. The study is useful for policy makers to address the serious concerns identified in the conclusion section, i.e. effectiveness of CEO compensation in addressing the lean innovation strategies in emerging economy like that of China.Originality/valueGiven the usually considered conservative approach of family firms towards innovation, this is the first study which has tested the moderating role of CEO compensation on family firms and lean innovation relationship in an emerging economy. This study is unique because it provides a detailed analysis of lean innovation process by splitting the process into different stages. The negative moderating impact of CEO compensation raises new concerns to resolve agency conflicts.

Compensar ou monitorar os executivos?

A literatura prediz duas principais formas de mitigar os conflitos de agência que surgem pela separação do controle e da propriedade, porém não aponta qual seria o mais apropriado. Assim, o presente estudo buscou identificar a eficiência dos mecanismos de governança corporativa, em se tratando de compensação aos executivos (incentivos explícitos e implícitos) e monitoramento (conselho de administração), na resolução dos conflitos de agência, entre os executivos principais e os acionistas de empresas de capital aberto brasileiras. Para isso, foram aplicados modelos dinâmicos de regressão linear múltipla, estimados pelo Método dos Momentos Generalizados Sistêmico (GMM-Sys), em um painel de dados não balanceado para 42 empresas, de 1999 a 2016. Identificou-se que o monitoramento é o meio mais eficiente para mitigar os problemas de agência, em que os conselheiros são agentes ativos no processo de verificação das ações dos executivos, gerando resultados consistentes que afetam positivamente o desempenho. Este estudo coloca à prova a prerrogativa de que o conselho de administração é “figurativo” no Brasil, tendo um desempenho significativo no monitoramento.

Corporate governance in the shipping industry: board interlocks and agency conflicts

PurposeThis paper aims to explore the effect of interlocking directorates on agency conflicts and corporate performance in the shipping industry.Design/methodology/approachThe authors use social network analysis to discover central nodes in the network of personal and corporate connections in an international sample of 110 listed shipping companies.FindingsAssessing network structure, the authors find that the network of corporate leaders is denser than the network of shipping companies. The network of shipping companies is populated with many isolated nodes; the network of shipping executives and directors is populated with many cohesive groups in which the longest distance between two corporate leaders is two companies. The authors find that interlocking corporate leadership can help resolve agency conflicts in the shipping industry, bearing a negative effect on the magnitude of agency costs. The extent of leadership overlaps is associated with board size, financial leverage and profitability. The relationship between profits and interlocks is bidirectional, implying that interlocking directorates bear a positive effect on asset returns.Originality/valueThe authors map the relational structures in the social networks of companies and company leaders in the shipping industry and discover the cross-sectional determinants of interlocks in the shipping industry. The finding about the effect of interlocks on profitability and agency costs bears policy implications for the design of corporate governance in the shipping industry.

How Corporate Governance Influence Dividends on Different Corporation Lifecycle Stages

«Вестник Санкт-Петербургского университета. Экономика» — научно-теоретический рецензируемый журнал, обобщающий результаты исследований ученых всего мира в различных областях науки, включая мировую экономику, историю развития экономики и экономической мысли, финансы, кредит и страхование, теорию и практику управления, статистику и учет, экономико-математическое моделирование.

Auditor monitoring and verification in financial contracts: evidence from earnouts and SFAS 141(R)

We study how monitoring and verification of accounting-based performance benchmarks influences the design and efficiency of earnout contracts. Earnouts are commonly used to resolve agency conflicts arising in mergers and acquisitions, but these contracts create measurement and other agency problems when contingent payments are tied to future accounting-based performance. Exploiting changes in auditor monitoring of earnouts that arose as\ a consequence of SFAS 141(R), we find that acquisition contracts are more likely to incorporate accounting-based earnouts and that contingent payments tied to accounting-based performance benchmarks make up a larger portion of the consideration when acquiring firms have high-quality auditors. We also find that market reactions to announcements of earnout deals are more positive after SFAS 141(R) for acquisitions most susceptible to disputes over accounting-based performance metrics and these results are more pronounced for acquiring firms with high-quality auditors. By exploiting the features of this unique setting, we illuminate the role of monitoring and verification of accounting information in financial contracts.

Do Firm-Bank Relationships Affect Corporate Cash Holdings?

This paper explores the impact of firm-bank relationships on corporate cash holdings using a sample of more than 4,000 Ukrainian companies over the period from 2008 to 2015. The empirical evidence suggests that the duration of the relationship and the presence of multiple bank relationships affect corporate cash holdings. Specifically, an increase in the length of a bank’s relationship with a main bank initially reduces corporate cash holdings but the effect turns positive due to the hold-up problem when the relationship matures. We also observe that companies with a greater number of bank relationships tend to hold more cash reserves, whereas more competition among banks allows firms to hold less cash. Additionally, we document that firm-bank relationships are important in helping firms resolve agency conflicts and facilitate reducing a firm’s financial constraints.

A Good Reputation: Protection against Shareholder Activism

When shareholders become dissatisfied with a public company’s policies or actions, they may resort to activist interventions. Shareholder activism has been described as an attempt to resolve agency conflicts by directly influencing management or board decisions. Shareholder activism may be incited by a lack of focus on shareholder value, a misalignment of corporate governance or a number of social and environmental policy issues. Over recent years, shareholder activism has become more frequent, professional and costly to corporations. Large, visible companies are held to be most susceptible to activist interventions, potentially damaging their corporation reputation. In this study, we analyze the effect of a good corporate reputation on the susceptibility of public companies to shareholder interventions in the form of proxy fights. We consider both the frequency and success of shareholder proposals and differentiate the effect of corporate reputation by issues context. Our findings indicate that a good corporate reputation serves as a two-fold inoculation against shareholder interventions, reducing both the frequency and success of proxy fights.

Segment Disclosure Transparency and Internal Capital Market Efficiency: Evidence from SFAS No. 131

ABSTRACTUsing the adoption of SFAS 131, I examine the effect of segment disclosure transparency on internal capital market efficiency. SFAS 131 requires firms to define segments as internally viewed by managers, thereby improving the transparency of managerial actions in internal capital allocation. I find that diversified firms that improved segment disclosure transparency by changing segment definitions upon adoption of SFAS 131 experienced an improvement in capital allocation efficiency in internal capital markets after the adoption of SFAS 131. In addition, I find that the improvement in internal capital market efficiency was greater for firms that suffered more severe agency problems before the adoption of SFAS 131 and also for firms whose managers faced stronger incentives to improve efficiency after the adoption of SFAS 131. My results suggest that more transparent segment information can help resolve agency conflicts in the internal capital markets of diversified firms, thus improving investment efficiency.

Factors influencing on-market share repurchase decisions in Australia

Purpose – The purpose of this study is to examine factors influencing decisions to repurchase shares on-market in Australia. The present study also examines the role of board size, board independence and chief executive officer duality on the decision to repurchase shares on-market by Australian firms. Design/methodology/approach – This study blends the traditional motivations of share repurchases with the influences of governance. The sample consists of all non-financial firms included in the Australian All Ordinaries Index (AOI) for the period 2004-2010. The repurchase sample consists of 104 repurchases undertaken by 62 firms. A probit panel model is used to analyse the decision to repurchase shares on the market. To account for unobserved heterogeneity, random effects panel models are also used. Findings – Analyses of a sample of non-financial firms included in the AOI for the period 2004-2010 show that size is significantly positively correlated with the decision to repurchase shares, thus supporting the agency cost. Findings also support the undervaluation and signalling hypotheses. Similarly, there is evidence in support of the view that firms repurchase shares to reach their target optimal capital structure. The present study also finds a significant positive association between board independence and the decision to repurchase shares in Australia. Research limitations/implications – On-market share repurchases help firms to signal their future growth opportunities and resolve agency conflicts. Signals from repurchases also help markets discover the true fundamental values of firms. Governance plays an important role in improving the effectiveness of on-market share repurchases, as independent directors provide both monitoring and discipline which helps to ensure that firms have valid motivations in undertaking share repurchases. Practical implications – These findings have implications for capital restructuring and governance policies. Principle-based governance frameworks that prevail in countries like Australia work as well as rule-based governance. Originality/value – This study highlights the complementary roles that financial policies and corporate boards play in corporate governance. Independent boards ensure that firms pursue appropriate financial policies that help resolve agency conflicts and information asymmetry problems.

Segment Disclosure Transparency and Internal Capital Market Efficiency: Evidence from SFAS No. 131

Using the adoption of SFAS 131, I examine the effect of segment disclosure transparency on internal capital market efficiency. SFAS 131 requires firms to define segments as internally viewed by managers, thereby improving the transparency of managerial actions in internal capital allocation. I find that diversified firms that improved segment disclosure transparency by changing segment definitions upon adoption of SFAS 131 experienced an improvement in capital allocation efficiency in internal capital markets after the adoption of SFAS 131. In addition, I find that the improvement in internal capital market efficiency was greater for firms that suffered more severe agency problems before the adoption of SFAS 131 and also for firms whose managers faced stronger incentives to improve efficiency after the adoption of SFAS 131. My results suggest that more transparent segment information can help resolve agency conflicts in the internal capital markets of diversified firms, thus improving investment efficiency.

Disclosure and agency conflict: Evidence from mutual fund commission bundling

This study provides empirical evidence on the role of disclosure in resolving agency conflicts in delegated investment management. For certain expenditures, fund managers have alternative means of payment which differ greatly in their opacity: payments can be expensed (relatively transparent); or bundled with brokerage commissions (relatively opaque). We find that the return impact of opaque payments is significantly more negative than that of transparent payments. Moreover, we find a differential flow reaction that confirms the opacity of commission bundling. Collectively, our results demonstrate the importance of transparency in addressing agency costs of delegated investment management.

Why Does Takeover Vulnerability Matter to Debtholders?

Recent work documents that firms that are more vulnerable to takeover have higher borrowing costs. This paper investigates the reasons behind this stylized fact. My results show that firms with few antitakeover defenses face a higher cost of debt because lenders are concerned that takeovers may result in leverage increases. Specifically, I find that takeover vulnerability does not increase loan spreads when the loan deal contains covenants restricting leverage. In order to identify the effect of covenants on spreads, I use two instruments to control for the endogeneity of covenants, which arises from the fact that lenders are more likely to include covenants when lending to riskier firms. My first instrument exploits exogenous supply-side variation in the contracting strictness of the lead-arranger lender, induced by lender-specific factors such as the rate of past defaults suffered by the bank in unrelated loans. My second instrument makes use of the relation between syndicate size and the likelihood that a given loan includes covenants. This instrument exploits exogenous variation in the contribution of the deal to the idiosyncratic risk of the lead bank’s loan portfolio. The identifying assumption is that lead banks tend to include covenants in those loans whose risk has a higher correlation with the risk of their existing portfolio, so that they can syndicate a larger share of such loans. Overall, my findings show how debt covenants can successfully resolve agency conflicts between shareholders and debtholders. In the absence of covenants, takeover defenses have opposite effects on the cost of equity and debt capital. Yet this difference disappears when debt deals contain leverage-limiting covenants.

International Evidence on Financial Derivatives Usage

Theory predicts that nonfinancial corporations might use derivatives to lower financial distress costs, coordinate cash flows with investment, or resolve agency conflicts between managers and owners. Using a new database, we find that traditional tests of these theories have little power to explain the determinants of corporate derivatives usage. Instead, we show that derivative usage is determined endogenously with other financial and operating decisions in ways that are intuitive but not related to specific theories for why firms hedge. For example, derivative usage helps determine the level and maturity of debt, dividend policy, holdings of liquid assets, and international operating hedging.

Disclosure and Agency Conflict in Delegated Investment Management: Evidence from Mutual Fund Commission Bundling

This study provides empirical evidence on the role of disclosure in resolving agency conflicts in delegated investment management. For certain expenditures fund managers have alternative means of payment which differ greatly in their opacity: payments can be expensed (relatively transparent); or bundled with brokerage commissions (relatively opaque). We find that the return impact of opaque payments is significantly more negative than that of transparent payments. Moreover, we find a differential flow reaction that confirms the opacity of commission bundling. Collectively, our results demonstrate the importance of transparency in addressing agency costs of delegated investment management.

Are maturity and debt type decisions interrelated? Evidence from Australian firms in international capital markets

This paper models the interrelationship between maturity and debt type decisions that arise from agency and flotation cost hypotheses. Private debt and short-term debt are substitutes for resolving agency conflicts, whereas large public debt issues and lengthening maturity are alternative mechanisms for mitigating large fixed transaction costs. Using a sample of international bonds and syndicated loans of Australian firms, we find evidence that maturity has a strong direct effect on debt choice, but weak evidence that debt choice affects maturity. However, a direct simultaneous relationship is found when Eurobonds are excluded from the sample or treated as private debt.