Solving Agency Problems Research Articles

Accounting information quality and cash holdings—Moderating effects based on state ownerships and local appointments

PurposeThe purpose of this study is to explore the continuity and stability of the impact of accounting information quality on cash holdings, and the moderating effect of this relationship on state ownerships and local appointments.Design/methodology/approachBased on China's companies from 2011 to 2019, the authors divided cross-section and panel samples, adopted a linear and classification model and performed grouping regression.FindingsThe authors find that: first, the quality of corporate accounting information can significantly improve the level of cash holding, giving play to the strategic value effect of cash holding. But that boost is based on economies being able to solve agency problems. Second, the reduction of earnings management and the improvement of accounting information quality of NSOEs improve the level of cash holdings, while SOEs are on the contrary. Third, local appointments can play to the emotional strengths of their hometowns and play a synergistic role in this relationship, but the supervision effect of remote appointments is not obvious.Originality/valueThrough endogeneity and other tests, the conclusion is robust. Based on the agency and information asymmetry theory, the authors considered China's institutional and cultural factors, optimized accounting information's measurement and expanded the research boundary of the accounting field. The authors believe that applicable scenarios should be fully considered in the concluding relationship between accounting information quality and cash holdings. Enterprises should give full play to the advantages of cash holdings in strategic decision-making and financial efficiency, improve the quality of accounting information and also consider state ownerships and the differences in directors' emotions to reduce internal agency costs.

Corporate culture and board gender diversity: Evidence from textual analysis

Exploiting a distinctive measure of corporate culture based on advanced machine learning, we investigate the effect of board gender diversity on corporate culture. Our results demonstrate that greater board gender diversity considerably strengthens positive corporate culture. The findings support the notion that board gender diversity enhances board oversight and helps solve agency problems, resulting in managers being compelled to take measures that benefit shareholders and consequently, building a strong company culture. Further analysis validates the results, including propensity score matching (PSM), entropy balancing, an instrumental-variable analysis, Lewbel's (2012) heteroscedastic identification, and Oster's (2019) testing for coefficient stability. Our study is the first to link board gender diversity to corporate culture, using cutting-edge information obtained from sophisticated machine learning.

The value relevance of mandatory sustainability reporting assurance

Sustainability reporting assurance (SRA) ensures the credibility of sustainability information disclosed by companies. This practice has continued to evolve, particularly within regulatory frameworks. The SRA is widespread among the largest French and South African companies because of the requirements of GRENELLE II and KING III laws. The increased regulation of SRA and the increased rate of obtaining assurance motivated us to conduct our study. This study examines the impact of mandatory SRA on firm value. We run a fixed-effects ordinary least squares (OLS) panel model to test our hypothesis for the 2007–2018 period on a sample of 88 South African listed companies on the Johannesburg Stock Exchange (JSE) and 83 French listed companies on the SBF120 index. We use Tobin’s Q to measure firm value. Our results show a significant positive association between mandatory SRA and firm value. This finding implies that SRA regulations positively affect investors’ perceptions of firm performance, particularly firm value, for two reasons. First, mandatory SRA may strengthen firm legitimacy and establish a good reputation. Second, the adoption of SRA regulations plays an important role in reducing asymmetric information between various actors and solving agency problems between managers and shareholders. Regulators may be interested in the findings when considering current and future assurance requirements for sustainability reporting, and shareholders when considering SRA as an investment choice criterion.

Mediasi Biaya Keagenan pada Pengaruh Kebijakan Utang dan Kebijakan Dividen terhadap Nilai Perusahaan-perusahaan Sektor Barang Konsumen Primer yang Terdaftar dalam Indeks Idxnoncyc Bursa Efek Indonesia Periode 2018-2020

The primary purpose of establishing a company is to maximize its value of the company. In that process, firm value is inseparable from agency problems caused by shareholders' and managers' different interests. Several mechanisms are expected to reduce agency problems, including debt and dividend policies. However, until now, the role of these two policies in solving agency problems is still inconsistent. This study aimed to determine how agency costs mediate debt and dividend policy on firm value. The fundamental theories to solve this research problem are agency and free cash flow theories. The object of this study is to the primary consumer goods sector companies listed on the IDXNONCYC index on the Indonesia Stock Exchange in the 2018-2020 period, with a total final sample of 25 companies or 75 units of analysis. The data analysis technique used in this study is the path coefficient test using SmartPLS 3.2.9. With this technic, the authors analyze the outer model test, inner model test, and the goodness of fit test. The outer model test with bootstrapping outer weights has an invalid indicator, namely the PBV indicator. Therefore this indicator needs to be eliminated. The goodness of fit states that the model is significant but has a weak model. This study found that debt and dividend policy positively affect firm value and negatively affect agency costs. Agency costs have a positive and significant effect on firm value. Agency costs have no mediation effect of debt and dividend policy on firm value.

Peran Moderasi Kantor Akuntan Publik Big 4 Pada Pengaruh Financial distress Terhadap Earning Management

This study examines the effect of financial distress on earnings management by being moderated by KAP BIG 4, leverage and CFO with the aim of being able to minimize earnings management behavior to solve agency problems. This research was conducted on agricultural and mining sector companies. The final sample was 105, using purposive sampling method and using Moderated Regression Analysis (MRA) analysis technique. The results of the analysis show that financial distress has a positive effect on earnings management in agricultural and mining sector companies. Financial distress conditions encourage earnings management behavior. KAP BIG 4 has not been able to moderate the effect of financial distress on earnings management. Suggestions for further research can be to research more broadly in the manufacturing sector and add variables such as tax avoidance or ROE and DER.
 Keywords: Financial Distress; Earnings Management; Agency Theory; KAP BIG 4

Managerial Accounting for Decision-Making and Planning

Managerial Accounting for Decision-Making and Planning

Network ambidexterity and environmental performance: Code‐sharing in the airline industry

AbstractThe most common form of horizontal collaboration within the airline industry is code‐sharing, which provides firms with many economic and operational benefits, although what happens in the environmental area is less certain. How should companies address code‐sharing to contribute to sustainability? The main objective of this work is to analyse the impact that this type of horizontal collaboration can have on the environmental performance of airlines. From this, we propose that network ambidexterity—the ability to balance exploration with new partners and exploitation with prior partners—is an adequate strategy to solve agency problems derived from collaboration practices to achieve environmental outcomes. Using hierarchical regression analysis, our results reinforce code‐sharing as a critical resource for the improvement of environmental performance and identify the moderating role of network ambidexterity in the impact of alliances on environmental performance.

Revisiting the interconnection between governance mechanisms and firm performance: evidence from Vietnamese listed firms

PurposeCorporate governance plays a critical role in solving agency problems. However, previous findings on how governance mechanisms lead to high firm performance are inconclusive. Additionally, this relationship has not been well addressed in the context of transitional countries where governance systems and mechanisms are weak, leaving a gap for research. Hence, this study aims to shed light on the effects of four key governance components, namely, ownership concentration, chief executive officer duality, board size and gender diversity, on firm performance.Design/methodology/approachThis study reports on the econometric panel data analysis and fuzzy-set qualitative comparative analysis (fsQCA) of 1,424 firm-year observations from listed companies in Vietnam covering the period of 2010–2017.FindingsThe econometric panel data analysis confirmed the net effects of single solitary governance components. FsQCA revealed equifinal configurations of components that explain high firm market- and accounting-based performance.Practical implicationsThese findings are relevant for firms in transitional and emerging markets, aiming to adopt the most suitable internal mechanisms to pursue their performance objectives and for regulators interested in enhancing the advantages of the capital market.Originality/valueThis study provides empirical evidence that firm performance can be improved when the appropriate corporate governance mechanisms are selected. As there are equifinal paths leading to the desired outcome of high performance, firms from different industrial and national contexts should mindfully apply any uniform corporate governance code.

Corporate governance and investment cash-flow sensitivity: evidence from Tunisia

The aim of this paper is to investigate the effect of corporate governance quality on investment cash-flow sensitivity. We use panel data for a sample of 40 Tunisian non-financial firms listed on the stock exchange over the 2007 to 2016 period. Our results indicate that investment is sensitive to cash-flow but this investment cash-flow sensitivity is reduced when firms exhibit better governance quality. These findings suggest that improvement of corporate governance can solve agency problems and reduce financial constraints. We conclude that better governance leads to more efficient investment allocation in Tunisia.

Corporate governance and R&D investment by European listed companies

The positive effects of R&D investment on innovation, productivity, and sustainability are well documented. However, findings regarding the impact of corporate governance on R&D investment are mixed, despite arguments supporting the role of governance mechanisms in solving agency problems. This study focuses on the relationship between governance mechanisms and R&D investment using a sample of large companies listed in European countries. The data cover the period from 2002 to 2013. These data are analyzed using an econometric panel data method and the recently developed method of panel data fuzzy-set qualitative comparative analysis. The results reveal the importance of institutional context and highlight the configurations of governance mechanisms that lead to high and low levels of R&D investment. These findings are relevant for companies aiming to adopt the most suitable governance mechanisms to pursue their R&D objectives and for policymakers interested in promoting R&D investment.

Ways to solve agency problems in corporate structures with using accounting information: non-institutional aspects

Purpose. The aim of the article is to analyse and substantiate the ways to solve the consequences of an agency problem in corporate structures based on the use of accounting information. Methodology of the research. The theoretical basis of the research is the scientific works of domestic and foreign scientists on the problems of accounting information formation in the issues of solving agency problems in corporate structures. The following methods are used to achieve the goal of the study: general scientific methods (abstraction, comparison, generalization, analysis, synthesis) – to know the basic elements of accounting information; critical analysis and systematic approach – when disclosing the characteristics of the main elements of solving an agency problem in corporate structures; abstract and logical method – to formulate the conclusions of the study. Findings. The types of opportunistic behaviour regarding the moment of contracting according to agency theory are substantiated. The role of accounting information at the pre-contractual stage of activity of corporate structures is determined. The features of understanding of accounting as one of the basic elements of the corporate governance system, which allows to minimize the consequences of an agency problem, are revealed. The role of accounting information at the post-contracting stage of corporate structures activity is determined. Originality. The possibility of using accounting information for the implementation of opportunistic behaviour by agents in the activity of corporate structures is substantiated. The ability of the accounting system to counteract the hidden intentions that agents may have after contracting has been identified. A matrix classification of approaches to solving the consequences of agency problems in corporate structures has been developed. Practical value. Implementation of the components of accounting information proposed in the study will allow to substantiate the role of accounting information in the application of each of the selected approaches to solving the consequences of the agency problem in corporate structures. Key words: corporate governance; agency problem; adverse selection; moral hazard; accounting information.

Ending Global Poverty: Why Money Isn’t Enough

Between 1981 and 2013, the share of the global population living in extreme poverty fell by 34 percentage points. This paper argues that such rapid reductions will become increasingly hard to achieve for two reasons. First, the majority of the poor now live in middle-income countries where the benefits of growth have often been distributed selectively and unequally. Second, a reservoir of extreme poverty remains in low-income countries where growth is erratic and aid often fails to reach the poor. If the international community is to most effectively leverage available resources to end extreme poverty, it must ensure that its investments in institutions and physical infrastructure actually provide the poor the capabilities they need to craft an effective pathway out of poverty. We term the human and social systems that are required to form this pathway “invisible infrastructure” and argue that an effective domestic state is central to building this. By corollary, ending extreme poverty will require both expanding state capacity and giving the poor power to demand reforms they need by solving agency problems between citizens, politicians, and bureaucrats.

The Influence of Fiduciary Laws and Norms on Economic Development: Lawyers as Trusted Agents in Nineteenth Century American Commerce

This article is the first to demonstrate the important role that fiduciary principles, and the attorneys who adopted them, played in American economic development during the nineteenth century. Our original historical research provides a detailed look at agency relationships during the period. We show that (1) lawyers were heavily involved as trusted agents in U.S. commerce during the nineteenth century, and that (2) their profession’s devotion to fiduciary principles, enabled them to play this crucial role as intermediaries. We argue that principles of fiduciary law, disseminated by lawyers, helped to solve agency problems, which institutional economists consider to be a significant barrier to modern economic development and growth. This critical role of fiduciary law in the development of American capitalism has been missed by economists who interpret fiduciary law as a form of contract. Only by understanding fiduciary law as a distinct normative regime, can we appreciate how it served to constitute a social role for lawyers that helped generate trust in a risky economy. Understanding fiduciary law’s place in the development of American capitalism illustrates important connections between the legal and cultural development of market institutions and has implications both for scholars and for policymakers engaged in modern development efforts.

Managerial Equity Holdings and Income Smoothing Incentives

ABSTRACTWe explore how managerial stock holdings and option holdings affect CEOs' income smoothing incentives. Given the different roles of stock holdings and option holdings in solving agency problems, managers may smooth past earnings using discretionary accruals for the purpose of revealing information to help investors better predict future earnings or for the purpose of hiding volatility of past earnings. We find the association between past smoothing and predictability of future earnings is increasing (decreasing) in CEO stock (option) holdings. Results are consistent with stock holdings aligning the interests of managers and shareholders, and managers using discretionary accruals to smooth past earnings to reveal information to investors about future performance. In contrast, option holdings have been linked with excessive risk taking by managers, and managers use discretionary accruals to mask volatility of less predictable earnings. We demonstrate that income smoothing can be informative or opportunistic, depending on the incentives of CEOs.

Managerial Equity Holdings and Income Smoothing Incentives

Our study explores how managerial stock holdings and option holdings affect CEOs’ income smoothing incentives. Given the different roles of stock holdings and option holdings in solving agency problems, managers may smooth past earnings using discretionary accruals for the purpose of revealing information to help investors better predict future earnings, or alternatively, for the purpose of hiding volatility of past earnings. We find that the association between past smoothing and predictability of future earnings is increasing (decreasing) in CEO stock (option) holdings. The results are consistent with stock holdings aligning the interests of managers and shareholders, and managers using discretionary accruals to smooth past earnings to reveal information to investors about future performance. In contrast, options holdings have been linked with excessive risk-taking by managers, and managers use discretionary accruals to mask volatility of less predictable earnings. We also document similar effects of CFOs.

Fair Value Accounting, Transparency and Financial Stability

Prudential regulation relies on asset values measured using fair value accounting standards. However, determining fair values of illiquid assets is difficult because doing so involves judgment and estimation. This paper examines how prudential regulation aimed at solving agency problems affects financial institutions' incentives to use Level 2 versus Level 3 fair value reporting, as well as financial stability. Crucially, Level 3 reporting allows financial institutions to use their noisy private information, whereas Level 2 fair values are measured with public information. My analysis shows regulators optimally leave to bankers the discretion to report illiquid assets at Level 2 or Level 3. Interestingly, bankers report at Level 3 only if they have good private information about the assets' quality. Moreover, relative to Level 3 reporting, Level 2 reporting increases systemic risk, because it relies on public information. Thus, prudential rules relying on precise Level 2 fair values are a double-edged sword: they are efficient at solving agency problems within financial institutions but decrease financial stability. The paper reconciles the conflicting empirical evidence on the link between fair value accounting and financial stability.

Solving agency problems in Chinese family firms – A law and finance perspective

To overcome the potential for omitted-variable and aggregation biases in country-based comparisons commonly adopted in the law and finance literature, this study designs a within-country analysis of legal measures toward resolving agency problems in Chinese family firms. Our findings show that agency costs in family firms can be significantly minimized by the evolution of formal legal rules, even with weak enforcement of investor protection. These results have important implications for economic reform and corporate development in emerging economies, because they show that the development of rules and regulations does matter in countries with weak enforcement.

Executive Compensation and Debt - An Investigation of Investment Decisions

We investigate the role of debt in solving agency problems by proposing a theoretical model that allows firms to choose from three investment opportunities, namely, zero risk, low risk and high risk. The theoretical model shows that a nonlinear relation potentially exists between debt and the pay-for-performance sensitivity of the executive compensation contract. The nonlinearity is driven by the firm’s risk preference which is reflected in its strategic orientation. The validity of the theoretical model is examined empirically by estimating a panel threshold regression model, whose functional form can be derived directly from the theoretical framework. We use a sample of S&P1500 firms over the period 1992-2013. Empirical tests confirm that debt affects the pay-for-performance sensitivity of the executive compensation contract differently, depending on the firm’s risk preference.

Mehanizmi rešavanja agencijskog problema u savremenoj korporaciji

Prevention of reduction in value of business assets or avoidance of yield losses for shareholders could be achieved by applying various mechanisms for solving agency problems. In order to reduce the management's deviation from shareholders' interests, shareholders could: 1) design compensation package for the management team, and 2) monitor the activities of management. Overcoming the agency's problems can be achieved: the division of responsibilities and control mechanisms between the management and the board of directors, increasing the level of transparency in defining the obligations and ways to reward management, increasing the ownership stake of shareholders with greater share in the equity and the replacement of inefficient management. The authors first present the agency problem and then analyze the ways of its resolving aimed at reducing or completely removing the conflict between shareholders and managers.

Awards at work

Social incentives like employee awards are widespread in the corporate sector and may be important instruments for solving agency problems. To date, we have little understanding of their effect on behavior. Unique panel data from the call center of a Fortune 500 financial services provider allow us to estimate the impact of awards on performance. Winning an award for voluntary work behaviors significantly increases subsequent core call center performance. The effect is short-lived, mainly driven by underperforming agents, and is reflected mostly in dimensions of the job that are hard to observe. We discuss various theories that could explain the effect.