Types Of Agency Costs Research Articles

Research on the Mechanism of ESG Performance's Impact on Enterprise Value

Clarifying the impact of enterprise ESG performance on enterprise value from multiple perspectives plays an important role in promoting the development of new quality productivity. This article is based on data from Chinese listed companies from 2013 to 2022, and from the perspective of corporate governance, examines the intrinsic relationship between corporate ESG performance and corporate value generation. Using the first type of agency cost as an intermediate variable, it analyzes the impact path of "ESG performance corporate governance corporate value". The results indicate a significant positive correlation between corporate ESG practice performance and corporate value. There is a significant negative correlation between corporate ESG practice performance and agency costs; The improvement of ESG practice performance can enhance enterprise value by reducing agency costs. The study provides empirical evidence for the positive impact of ESG practices on corporate value for Chinese listed companies, increasing the attention of enterprises, investors, and governments to ESG, and encouraging enterprises to achieve the goal of enhancing corporate value through participation in ESG practices and other means.

Equity incentive, separation of two rights and corporate performance: research on corporate governance based on two types of agency costs

This paper discusses the impact of equity incentive and the separation of two rights on corporate performance and the intermediary role of two kinds of agency costs by using the revised stepwise method taking A-share listed companies as the research object and using the Jones model to remove the impact of earnings management on corporate performance. The classification of industry and nature is introduced to further judge the heterogeneity of the conclusions. The results show that equity incentive can significantly reduce the first kind of agency cost and improve corporate performance, but the intermediary effect of the first kind of agency cost between equity incentive and corporate performance is not significant. Limiting the degree of separation of the two rights can significantly reduce the second kind of agency cost to improve corporate performance, and the second kind of agency cost has a partial intermediary effect between the degree of separation of the two rights and corporate performance. The results of different industries are heterogeneous and need to be treated differently. It is further found that non-state-owned enterprises can improve corporate performance through governance measures, but state-owned enterprises have not achieved a significant governance effect. This paper clarifies the black box between corporate governance and corporate performance from the effects of the two types of agency costs and effectively supplements the existing research system, which also provides a reference for market regulators to formulate policies.

Independent director network, agency costs and stock price crash risk

It is of great significance to improve the corporate governance structure to study whether independent directors play the role of ‘vase’ in the governance of listed companies. Based on the social network theory, this article constructs the social network formed by interlocking independent directors and examines the influence of independent director network on stock price crash risk. The mechanism test analyses the mediating effect of principal–agent problem and large shareholder’s tunnelling on stock price crash risk. The empirical research shows that the higher the network centrality of the company’s independent directors, the lower the stock price crash risk. The independent director network can restrain the company’s stock price crash risk by reducing two types of agency costs. Further research finds that the influence of independent director network on stock price crash risk is more pronounced in companies with unreasonable ownership structure, poor internal governance and weak external supervision. The research conclusions have important implications for listed companies to reduce the risk of stock price crash and maintain the stability of the capital market.

Can compulsory liability insurance reduce agency costs? Evidence from China

This paper discusses the impact mechanism of compulsory liability insurance on agency costs. Studying the companies listed in China’s food manufacturing industries in 2011–2018, we find that compulsory liability insurance significantly reduces the two types of agency costs, namely, alleviating the principal-agent problem and the principal–principal problem. Robustness tests confirm this finding. The reduction of information asymmetry and the improvement of internal control quality are the mechanisms leading to this result. Compulsory food safety liability insurance plays a significant role in reducing agency costs when company ownership is concentrated or when media coverage is high. This paper provides empirical evidence for joint regulation by the public and private sectors, also provides theoretical reference for further optimizing food safety governance mode.

Governance effects of digital transformation: from the perspective of accounting quality

ABSTRACT With the rapid development of digital economy and technology in China, we research on whether corporate digital transformation in traditional industries can improve accounting quality as well as corporate governance. Our findings suggest that, firms proceeding more digital transformation have lower degree of earnings management and higher degree of accounting qualities. Digital transformation can improve accounting quality by reducing three types of agency costs. Specifically, digital transformation can improve corporate internal control, as well as attract more analyst tracking, to improve accounting qualities. Additional analysis suggests that, the governance effects of corporate digital transformation are more prevails in non-state firms, or weak information quality firms, as well as in long-term oriented firms. Corporate digital transformation can decrease real earnings management and stock price synchrony, increase accounting quality, reveals a positive governance effect.

Excessive Defense of Antitakeover Provisions and Enterprise Value Based on PSM-DID Quasi-Natural Experimental Method

Under the background of frequent hostile takeover events in China and the autonomy of the articles of association, the articles of association of listed companies even set up antitakeover provisions with an excessive defense that unreasonably restricts the rights of shareholders. Based on the role orientation of innovative supervision, the Small and Medium-sized Investors Service Center (hereinafter referred to as “Investment and Service Center”) proposes to modify the relevant noncompliance provisions in the form of a shareholder recommendation letter. As the basic requirements of the articles of association and the relevant laws in corporate governance are increasingly inconsistent, the legal review of the articles of association is particularly important. This article determines the identification standard of excessive defense of antitakeover provisions by manually collecting the shareholder suggestion letter of the investment service center, the announcement on amendment of association articles of listed companies, and relevant laws and regulations. On this basis, the PSM-DID quasi-natural experimental method is used to empirically test the impact of excessive defense of antitakeover provisions on enterprise value. The study finds that the excessive defense of antitakeover provisions significantly inhibited the enterprise value. In this article, taking a-share listed companies in Shanghai and Shenzhen stock markets in 2007–2018 as an example, with the construction of antiacquisition clause excessive defense index (ATP end), relying on the “quasi-natural experiment” method of PSM-DID, we discuss the impact of excessive defense antiacquisition clause on the value of the enterprise and its impact path analysis. Further study found that its restriction mechanism was reflected in the significant increase of the first type of agency cost and the second type of agency cost. At the same time, the correlation between management compensation and performance and the correlation between management and professional performance are further reduced. Excessive defense against antiacquisition terms can reduce the corporate value, and the impact path of this effect is achieved by increasing type 1 agent costs and type 2 agent costs. It shows that the controlling shareholders are more likely to collude with the management, which aggravates the agency problem. The research conclusion of this article provides legal and economic empirical evidence for listed companies to reasonably set up antitakeover provisions and is also of great significance to innovative regulatory methods such as investment service centers. Excessive defense against antitakeover terms will enhance the dual-ditch effect and ultimately damage corporate value.

Stakeholder engagement as a sustainable development strategy: Managerial entrenchment for cross‐shareholdings

AbstractWe analyze the effect of managerial entrenchment on firms' corporate social responsibility (CSR) activities. We use the cross‐shareholding ratio and the stable shareholders ratio, which characterize the Japanese corporate system, as proxy variables for managerial entrenchment. We choose two CSR/environmental, social, and corporate governance scores: those for vendors targeting only Japan and those for vendors targeting the entire world. The results show that increases in the cross‐shareholding and stable shareholder ratios decrease CSR activities. These results are consistent with the view that CSR activities are considered a costly investment for managers rather than a type of agency cost. Finally, we reveal that after the enactment of Japan's Corporate Governance Code in 2015, the cross‐shareholding and the stable shareholder ratios have not significantly affected CSR activities and that foreign institutional investors have promoted CSR activities.

Does the informal hierarchy of independent directors have a corporate governance effect? Evidence from China

ABSTRACT Using a large sample of Chinese A-share listed firms during 2008–2017, this study investigates whether and how the informal hierarchy of independent directors affects two types of agency costs. We find that the informal hierarchy of independent directors is negatively correlated with the two types of agency costs and the negative effect is robust to alternative empirical designs. Moreover, our further research indicates that ownership structure matters for the performance of independent directors. We provide empirical evidence for optimizing the independent director team structure and improving corporate governance.

Equity concentration and investment efficiency of energy companies in China: Evidence based on the shock of deregulation of QFIIs

This paper empirically tests the impact of equity concentration on the investment efficiency of Chinese energy companies based on the shock that the shareholding ratio restriction of qualified foreign institutional investors (QFIIs) is relaxed. We find that equity concentration significantly improves energy companies' investment efficiency in China. Equity concentration affects the investment efficiency by influencing the first type of agency cost and the information environment. Equity concentration plays a significant role in improving the investment efficiency when the decision-making power is decentralized while the external environment is complex. • First, the exogenous reduction of equity concentration is not conducive to energy companies' grasp of investment opportunities. • Second, high equity concentration improves the investment efficiency of energy companies. • Third, equity concentration affects the investment efficiency by influencing the first type of agency cost and the information environment. • Four, due to the internal decision-making power and the external environment, the relationship between equity concentration and energy companies' investment efficiency is different.

Agency cost of CEO perquisites in bank loan contracts

This study investigates the association between CEO perquisites and bank loan spreads. We collect detailed data on CEO perquisites from the proxy statements of S&P 500 firms between 1993 and 2015 to study this issue. The empirical evidence supports the agency cost view that the lending banks demand significantly higher returns (spread), more collateral, and stricter covenants from firms with higher CEO perquisites. We further confirm that the effect of these perquisites remains after we control for various corporate governance and agency cost factors. We conclude that banks consider CEO perquisites as a type of agency cost when they make lending decisions.

Doing more and doing better are two different entities: Different patterns of family control and environmental performance

AbstractFamily firms bear two types of agency costs, including type I and type II agency problems, in corporate environmental practices: (1) Outside executives at family firms hesitate to engage in environmental strategies, which can lead to drops in profits; (2) Controlling families employ opportunistically environmental management to achieve their interests. We argue that a primary cause for the agency problems lies on ineffective internal corporate governance at family firms, which can cause loss of managerial (or power) balance between outside executives and family executives. Our findings show that family firms with ownership and strategic control (FSC), which family executives and outside executives monitor and constrain each other, can achieve the highest environmental performance. Moreover, external controls, including product market competition and provincial environmental regulations, substitute effective internal control of FSC. The environmental performance premium of FSC is more prevalent when the production market competition is lower. Family firms with ownership, operational, and strategic control (FOSC) can achieve higher environmental performance within a province with more stringent environmental regulations.

Governance Effects of Minority Shareholders under the Internet Environment: From a Perspective of Agency Cost

Governance Effects of Minority Shareholders under the Internet Environment: From a Perspective of Agency Cost

Shareholder Protection and Agency Costs: An Experimental Analysis

Two competing principal–agent models explain why firms pay dividends. The substitute model proposes that corporate insiders pay dividends to signal and build trust with outside shareholders who lack legal protection. The outcome model, in contrast, surmises that when shareholders have legal protection, they demand dividends from insiders to prevent them from expropriating corporate funds. Either way, dividends represent an agency cost paid to align the interests of shareholders and insiders. Expropriations by insiders and reduced investment by shareholders are also agency costs, but they are difficult to identify with archival data. Using a laboratory experiment, we identify the impact of strengthened shareholder protection on all three types of agency costs. Dividend payout ratios are five times larger with stronger investor protection, insider expropriation ratios are twice as high, and outsider investment falls by 45%. Thus, we find evidence that strengthening shareholder protection introduces previously unidentified agency costs into the insider–investor relationship. Data and the online appendix are available at https://doi.org/10.1287/mnsc.2017.2770 . This paper was accepted by Uri Gneezy, behavioral economics.

Agency Cost of CEO Perquisite in the Bank Loan Contracts

This study investigates whether CEO perquisite of borrowing firms plays any significant role, both in terms of price and non-price settings, in financial contracts and reveals that lending banks demand significantly higher return (spread), more collateral, and stricter covenants from firms with higher CEO perks. These results hold after adjusting for CEO attributes, compensation schemes, and corporate governance of the borrowing firm. Therefore this study draws the conclusion that banks consider CEO perquisite as one type of agency cost when they make the lending decisions.

Optimal Agency Bias and Regulatory Review

AbstractWhy do bureaucratic principals appoint agents who hold different policy views from themselves? We posit an explanation based on the interplay between two types of agency costs: shirking on information production and policy bias. Principals employ biased agents because they shirk less. This creates an incentive for the principal to use review mechanisms that mitigate the resulting bias in the agents’ decisions. The availability of such review mechanisms encourages principals to employ more extreme agents. We apply the theory to explain various features of the administrative state. In contrast to existing accounts, in our model the use by the president of ideological bureaucrats at regulatory agencies and centralized regulatory review are complements. The use of bias to mitigate shirking results in an amplification of the swings of regulatory policy and heightens the role of regulatory policy in partisan politics.

Executive Compensation and Mosquito Abatement: A Public Goods Economic Argument to Revisit Mandated Proxy Access

In 2010, the US Court of Appeals for the DC Circuit struck down the mandated “proxy access” rule adopted by the Securities and Exchange Commission (“SEC”) on the grounds that the SEC had conducted a fatally inadequate economic analysis in promulgating the rule. This paper argues that the SEC can, and should, revisit the rule and consider one particularly compelling economic factor in favor of proxy access: The long-acknowledged economic condition called the “public goods” problem. “Public goods” analysis describes why market forces alone, in the absence of government intervention, historically under-provide socially beneficial “goods” such as national defense, fire protection, unpolluted air and water, or mosquito abatement. Similarly, the public goods dynamic prevents the dispersed mass of public company investors from having a meaningful mechanism to control agency costs generally, and runaway executive compensation costs in particular. The paper discusses three premises underlying this argument: (1) that a public goods problem must be addressed by government intervention, because market forces have already failed in a predictable way; (2) that corporate and financial managers and their apologists reflexively, and vehemently, defend even bad status quo business practices that benefit them, reviewing the experience of 80 years ago when government intervention, in the form of the securities laws, addressed the public goods problem of the under-supply to investors of corporate business information; and (3) that even though agency costs are inevitably incurred by companies, excessive executive compensation represents a specific type of agency cost that most boards currently do not constrain. The paper concludes that mandated proxy access represents an appropriate — and economically necessary — intervention by government to address the failure of the market to provide investors in all publicly traded companies with a mechanism to improve the accountability of board members to shareholders rather than to management, and thereby to improve the chances of addressing excessive executive compensation.

Optimal Agency Bias and Regulatory Review

Why do bureaucratic principals appoint agents who hold different policy views from themselves? We posit an explanation based on the interplay between two types of agency costs: shirking on information production and policy bias. Principals employ biased agents because they shirk less. This creates an incentive for the principal to use review mechanisms that mitigate the resulting bias in the agents' decisions. The availability of such review mechanisms encourages principals to employ more extreme agents. We apply the theory to explain various features of the administrative state. In contrast to existing accounts, in our model the use by the president of ideological bureaucrats at the regulatory agencies and centralized regulatory review are complements. The use of bias to mitigate shirking results in an amplification of the swings of regulatory policy and heightens the role of regulatory policy in partisan politics.

An empirical study on the impact of non-tradable share reform on ownership structure and agency costs

The purpose of this paper is to examine the impact of non-tradable share reform on ownership structure and the influencing path on equity agency costs in depth. Data from listed companies is used to analyse the changes of relationships between ownership structure and equity agency costs after non-tradable share reform. The result of the research shows non-tradable share reform has a distinct impact on agency costs. After non-tradable share reform, the correlation of ownership concentration and Type I agency costs becomes significantly negative, and the negative relation with Type II agency costs is enhanced. Furthermore, the relations between equity restriction and two types of agency costs shift from non-correlations to significantly positive ones. The link between proportion of public shares and Type I agency costs shifts from non-correlation to significantly positive correlation while the positive correlation with Type II agency costs is strengthened. The negative correlations among institutional investors and two types of agency costs are strengthened.

Tax Enforcement as a Corporate Governance Mechanism: Empirical Evidence from China

Manuscript Type: Empirical Research Question/Issue: This study first measures tax enforcement efforts for 35 tax regions within China, then analyzes the role of tax enforcement as a corporate governance mechanism by examining whether regional tax enforcement efforts reduce two types of agency costs in Chinese listed firms. Research Findings/Insights: Using archival data from a pooled sample of 917 listed firms with total 3,668 observations from 2003 to 2006 in China, we find the following results: (1) regional tax enforcement efforts reduce corporate agency costs between shareholders and managers and agency costs between blockholders and minority shareholders; (2) by reducing two kinds of agency costs, tax enforcement efforts improve a firm's market performance; and (3) the governance role of tax enforcement efforts is more significant for state-controlled firms than for entrepreneur-controlled firms. Theoretical/Academic Implications: This study suggests that tax enforcement can act as a corporate governance mechanism. Tax authorities not only have the ability to increase national tax revenue, but also play a positive role in decreasing agency costs, including agency costs between shareholders and managers and those between block shareholders and minority shareholders. Practitioner/Policy Implications: This study offers a new insight to policy makers interested in transforming economies that corporate governance build-up should be multidimensional. Besides the traditionally internal governance mechanisms represented by boards of directors and external governance mechanisms represented by takeover markets, tax enforcement is also an important corporate governance mechanism. The enforcement power of tax authorities could be better utilized to supervise firm operations in emerging markets.

An Experimental Investigation into Reputation Effects and the Demand for Auditing Services

ABSTRACT This research investigates the relationship between reputation and two types of agency costs, namely those associated with auditing and those associated with value-reducing activities of management resulting from their capitalizing on asymmetric information by misreporting income. A competitive-market model is used as a basis for developing and empirically testing hypotheses using an experimental-markets approach. This model includes (1) contracting between risk- neutral owners and risk-averse managers that allows risk sharing, (2) information asymmetry favoring managers over owners, (3) public financial reporting by managers, (4) the presence of endogenously-priced costly auditing that can be demanded by either management or owners, and (5) opportunities for managers to engage in value-reducing activities that are not directly observable by the owners. Two main hypotheses are set forth, both of which are found to be supported by formal statistical tests based on the data from the experimental markets as conducted in this study: (1) reputation effects reduce total agency costs. Further, these results show that agency cost reductions from reputation effects include both an increased rate of honest reporting by managers and a reduction in the demand for auditing by owners; and (2) the market rewards honesty and penalizes dishonesty in reporting.