Search

Faultlines can affect a board of director’s effectiveness in supervising senior managers, which in turn affects the value of a company’s cash holdings. Based on sample data from Chinese A-share listed companies from 2004 to 2016, we examine the relationship between board faultlines and the value of cash holdings. The empirical results indicate that board faultlines have a significant inhibitory effect on cash holding value. This inhibitory effect is stronger for board faultlines resulting from deep-level attributes. Furthermore, the inhibitory effect of board faultlines is stronger in state-owned enterprises (SOEs) than in non-SOEs. As an important governance mechanism, management shareholdings can reduce agency costs and mitigate the negative impact of board fissures on cash holdings. Overall, we enrich the literature on the economic consequences of board faultlines and their influence on cash holding value. We also offer companies practical suggestions for improving the supervisory mechanism of their board of directors.

[EN] Farmland abandonment is common in the southern EU countries. This complex phenomenon has a set of interlinked causes and consequences, among the latter the undermining of farmers' cooperatives role as supply aggregators. The paper discusses a multi-actor farmland consolidation model that avoids some of the drawbacks identified by literature to some models of land mobilization, mostly transaction and agency costs. This model consists on a local-based strategy of common land management, led by a cooperative and supported by a set of external agents. As empirical evidences, we show the attitudes of cooperatives' managers surveyed towards common land management and present a case study implementing this multi-actor model. This piece of evidence shows that strengthening social capital is crucial to the success of these social innovation experiences., The authors are grateful for the financial support of Ministry of Science and Innovation/European Regional Development Fund, Spain. Project "Strengthening innovation policy in the agri-food sector" (RTI2018-093791-B-C22). Data of land management practices in agricultural cooperatives were obtained with the support of Catedra de Estructuras Agrarias UPV-Generalitat Valenciana. They are also grateful to the journal editor and the anonymous reviewers for their constructive comments and suggestions which significantly improved this paper.

In the context of China’s drive to alleviate poverty, we focus on the initial public offering (IPO) firms located in China’s poor counties and investigate their IPO pricing and post-IPO performance. Contrary to the findings reported for the U.S., we find that the problem of information asymmetry between Chinese firms located in rural areas and their investors is so severe that these IPO firms are associated with significantly higher underpricing. This effect is more pronounced for firms located in rural areas with poor traffic systems. We do not find significant market performance differences between rural and urban firms after their IPOs, but the operating performance of rural firms improves in the short term. Our additional analyses indicate that rural IPO firms have significantly lower investor attention and higher agency costs than urban firms. Overall, we enrich the literature on IPO pricing and the economic effects of geographic location.

The file attached to this record is the author's final peer reviewed version. The Publisher's final version can be found by following the DOI link. This study examines the effects of co-opted directors and further tests the monitoring effectiveness of non-co-opted independent directors and co-opted independent directors on capital structure decisions. Employing a large sample of 2,548 US firms over the 1996-2015 period, we find strong evidence that co-opted boards exert a positive and significant influence on firms’ financial leverage. We also find that, whereas co-opted independent directors are positively associated with financial leverage, non-co-opted independent directors have a negative influence on a firm’s leverage ratio, suggesting that co-option weakens the effective monitoring, thereby increasing the firm’s leverage ratio. Further analysis indicates that co-opted boards adjust towards target leverage levels at a faster speed, with a half-life within a year for book and market leverage. Lastly, our results show that the agency costs of managerial discretion and stockholder-bondholder conflicts arising from board co-option are important drivers of financial leverage relative to tax incentives. Our results are robust to alternative measures of board co-option, financial leverage, and endogeneity concerns.

This study investigates the impact of corruption on corporate cash holdings in China. The political extraction argument predicts that firms might shelter liquid assets to avoid extraction by corrupt officials. Using data on A-shared listed firms between 2007 and 2012, we find that firms located in more corrupt regions hold less cash, supporting this hypothesis. Political resources help to diminish the risk of exploitation, reducing the extent to which liquid assets are sheltered. We find that the negative association between corruption and cash holding is more significant for non-state-owned enterprises (Non-SOEs) than for state-owned enterprises (SOEs). Moreover, the cash holdings of Non-SOEs without political connections are more sensitive to corruption than those of Non-SOEs with political connections. These findings demonstrate that expropriation by corrupt officials is an important factor driving firms to manage liquidity. Keywords: Corruption, Corporate cash holding, Political extraction, Asset sheltering, Agency cost

The concentration of both employment and services in a specific area of a town generates positive effects, but also impacts (congestion, transit issues, and others). Urban subcenters seek to approach economic activities to residents in peripheral urban spaces. The objective of this research is to evaluate the contribution to the mobility of implementing urban subcenters in a city. The model has a total cost function (users and agency costs) on a circular city (ring and radial routes) formulated using the continuous approximation method. The model solution addresses with mathematical optimization. The model evaluates a BRT network applied to scenarios of urban subcenters. The results of the modeling show that the implementation of subcenters obtains savings of 3.5% in rush hour. Thus, this strategy of urban planning generates improvements in the functioning of a public transportation system. Moreover, the maximum benefits are obtained in medium-sized subcenters in comparison to the CBD, which allows balancing user and agency costs. Therefore, the outcomes may be better with an urban pattern with subcenters, and a transit scheme adapted to the demand needs. The authors are members of BIT-Barcelona Innovative Transportation research group at BarcelonaTech. The work of the first author was also supported by CONICYT PFCHA/BCH 72160291 scholarship. This study had support from the Project 061312MT of the Departamento de Investigaciones Científicas y Tecnológicas (DICYT) of the Vicerrectoría de Investigación, Desarrollo e Innovación of the Universidad de Santiago de Chile (USACH).

Concrete pavements are widely used to carry heavy load and provide long-lasting solutions in highways, airports, and bridge decks. This chapter reviews the current state-of-practice in lifecycle cost analysis (LCCA) and lifecycle assessment (LCA) of concrete pavement repairs. Most studies focused on pavement rehabilitation alternatives, especially different overlay types, with assumption of relatively small contribution from routine maintenance of concrete pavement. Compared to the agency cost invested in the construction stage and the environmental burden brought by raw material and manufacturing, the impact of work zones on the cost of traveling public and the emission generated in the usage stage of pavement cannot be neglected. The integration of economic analysis and environmental assessment is critical to develop eco-efficient concrete pavement repair solutions for multiple-objective decision making. Future research recommendations are discussed for the purpose of improving accuracy of LCCA and LCA for the overall sustainability.

This study explores to what extent the Islamic financing instruments are used by non-financial firms and whether profitability influences such financing choice. Based on a panel data of firms from fourteen developing countries for the 2005-2009 period, we find that Islamic financing contributes a significant share of the firms’ capital structures. Less profitable firms are found more likely to use debt than equity in which case Islamic instruments were preferred over conventional debt. The finding suggests that Islamic financing does benefit less profitable firms, which is consistent with the agency cost perspective.

We study how creditor rights and culture interact with one another to influence corporate dividend payout policy. Where creditor rights are strong, creditors accept the status quo, which are large dividends in individualist and small dividends in collectivist traditions, respectively. Culture influences dividend payout where creditor rights are weak. In collectivist countries where group cohesion among corporate stakeholders results in perceived lower agency costs of debt and equity, creditors place few if any restrictions on dividend payout given weak creditor rights. In contrast, in individualist traditions, creditors continue to restrict dividend payouts under weak creditor rights. Our findings emphasize the importance of accounting for the interactions between creditor rights and culture in determining dividend policy.

The central objective of this paper is to empirically examine the relationship between the capital structure of Portuguese small and medium enterprises (SMEs) and their export performance. We focus our study in the Portuguese industrial firms due to their importance for the Portuguese economy and role played in the country’s economic recovery amid the recessionary environment of the last decade. Though many empirical papers studied the determinant factors of capital structure, the interaction between export performance and capital structure has been much less studied. We intend to fill that gap, particularly for the case of Portugal and focusing on SMEs, where agency and asymmetric information problems could impact more on export performance, and not on large and listed corporations. Using panel data methodology, considering a sample of 3.164 firms and the period from 2011 to 2014, the paper extends the literature since analyzes the impact of the presence in foreign markets on short and long-term indebtedness. Distinguishing between different sectors of activity, the results suggest that profitability, asset tangibility, size, liquidity and presence in foreign markets are key factors affecting the capital structure of industrial SMEs. Albeit not validating the “upstream-downstream” hypothesis, we highlight the possible role played by agency costs and information asymmetries over debt during the internationalization process.

Drawing on pecking order and agency cost theories, we assess the extent to which information asymmetry is an important determinant of firm value and the extent to which this relationship is conditional on the leverage level of firms. We also assess the impact of information asymmetry on firm value during the pre and post 2007/09 financial crisis period and for high and low growth opportunity firms. Using a large sample of UK firms, our empirical findings suggest that information asymmetry adversely impacts firm value, and that this effect decreases with firm's leverage. We also find that leverage has a negative effect on firm value, and that the marginal effect of leverage is lower for information asymmetric firms. Further, we find that the relation between information asymmetry and firm value is more pronounced in the post-crisis period than the pre-crisis period. Finally, we show that the impact of information asymmetry on firm value is higher (lower) for firms with high (low) growth opportunities.

Misappropriation has become the accepted explanation for the refinancing behavior of Chinese listed companies, although the evidence in support of such an explanation is worthy of further discussion. We argue that if a planned refinancing exercise does not become a reality, post-refinancing performance depends on the initial motivation for refinancing, i.e. misappropriation or the maximization of firm value. The success and failure samples provided by the approval system of the Chinese securities market provide us with a natural laboratory in which to distinguish between these two possible motivations for the refinancing behavior of Chinese listed firms. The results show the post-refinancing performance of firms in the success sample to be significantly better than the performance in the failure sample, with the difference even more significant when larger agency costs or more financial constraints exist. These findings indicate that Chinese listed companies do not engage in refinancing for misappropriation purposes alone. Rather, refinancing is more likely to be a rational choice made in full consideration of the costs and benefits. This paper provides new ideas for reexamining the motivations for the refinancing behavior of China’s listed firms. It also has one major policy implication. That is, relaxing and/or simplifying the country’s refinancing regulations could help to improve the efficiency of resource allocation in the Chinese securities market.

Climate change has the potential to impact long-term road pavement performance. Consequently, to maintain pavements within the same ranges of serviceability as before, current pavement maintenance strategies need to be re-assessed and, if necessary, changed. Changes in maintenance may lead to different agency costs and user costs as a consequence. This paper commences by defining an assessment procedure, showing how maintenance intervention strategies and Life-Cycle Costs (LCC) may be affected by future climate. A typical Virginia flexible pavement structure and anticipated climate change was used as an example. This example is believed to be representative for a great number of localities in the United States. A method using historical climatic data and climate change projections to predict pavement performance using Mechanistic-Empirical Pavement Design Guide (MEPDG) under current or future climate was introduced. Based on pavement performance prediction, maintenance interventions were planned and optimized. The maintenance effects of three treatments (thin overlay, thin overlay with an intermediate layer, and mill & fill) were considered. A Life-Cycle Cost analysis is reported that used binary non-linear programming to minimize the costs (either agency costs or total costs) by optimizing intervention strategies in terms of type and application time. By these means, the differences in maintenance planning and LCC under current and future climate can be derived. It was found, that for this simplified case study, pavement maintenance and LCC may be affected by climate change Optimized maintenance may improve resilience to climate change in terms of intervention strategy and LCC, compared to responsive maintenance.

The Ramsey–Cass–Koopmans neoclassical growth setup and the AK endogenous growth framework are two prototypes of a class of growth models where, by assumption, investment resources are always perfectly allocated to production. As a corollary, these models offer a partial view of the growth process circumscribed to a limit case, namely the most favorable case in which all possible frictions on the allocation of investment resources are absent. This paper adds to the conventional growth setup an optimal mechanism of assignment of investment resources that contemplates the possibility of inefficient allocation. In the assumed economy there is a single representative investor and a large number of firms that compete for the available resources. The new setup highlights how agency costs may deviate the economy from the benchmark growth outcome, potentially generating less desirable long-run results. The appeal of the proposed framework resides also on the fact that new determinants of growth emerge and take a leading role, namely the investor's sentiment and the quality of the firms' investment proposals. info:eu-repo/semantics/publishedVersion

This paper analyzes the role of stochastic uncertainty in a multi-sector housing model with financial frictions. We include time varying uncertainty (i.e. risk shocks) in the technology shocks that affect housing production and provide estimates of the time-series properties of risk shocks by using firm level productivity data. The analysis demonstrates that risk shocks to the housing production sector are a quantitatively important impulse mechanism for understanding housing price movements. Specifically, the model can match the volatility of housing prices observed in the data. It is also demonstrated that adjustment costs are important in replicating the contemporaneous correlation of housing prices with GDP and residential investment. Critically, bankruptcy costs act as an endogenous markup factor in housing prices and are an important determinant of house price volatility. However, in comparison to housing demand shocks, risk shocks have low explanatory power for real quantities.

We study the importance of investor rights in payout policy determination in Asia, using a sample of up to 52,778 firm years. The listed Asian firms located in relatively high investor protection, common law countries, have a greater tendency to payout and, if they do so, they tend to pay out more. We also examine the importance of distinctive creditor and minority shareholder rights in respect to payout policy determination. In our study of a variety of payout events (decisions to pay out, to initiate or omit payout and to markedly increase or decrease payout), we show that this set of payout events is principally determined by competing creditor and minority shareholder rights, rather than managerial sought reputation related effects, to diminish the cost of capital. Our findings indicate that creditors exert significant and far reaching influence over corporate payout policy decision-making, however, the importance of the agency costs of equity predominates.

This is the authors’ final, accepted and refereed manuscript to the article We are interested in understanding how agency conflicts in private firms arise through ownership structures and family relationships. Specifically, we analyze auditors’ increase of effort and firms’ choice of auditors in situations with higher level of agency conflicts. For a large sample of private firms, we use unique and confidential data (obtained through special permission by the government) to measure direct and ultimate ownership for each shareholder as well as extended family relationships (based on marriage and blood lines, going back four generations and extending out to fourth cousin) among all shareholders, board members, and CEOs. We first find that audit fees, our proxy for audit effort, vary as hypothesized with firmlevel characteristics related to ownership structures and family relationships. Second, we find evidence that firms in higher agency cost settings respond by having their financial statements audited by a higher-quality auditor (i.e., a Big 4 firm). However, for CEO family-related settings (i.e., where the CEO is related to the major shareholder or as the number of board members related to the CEO increases), we find no evidence of a greater demand for a Big 4 auditor.

This is the authors’ final, accepted and refereed manuscript to the article This paper compares the dividend policy of owner-controlled firms with that of firms where the owners are a minority relative to non-owner employees, customers, and community citizens. We find that regardless of whether owners or non-owners control the firm, the strong stakeholder uses the dividend payout decision to mitigate rather than to intensify the conflict of interest with the weak stakeholder. Hence, the higher the potential agency cost as reflected in the firm’s stakeholder structure, the more the actual agency cost is reduced by the strong stakeholder’s dividend payout decision. These findings are consistent with a dividend policy in which opportunistic power abuse in stakeholder conflicts is discouraged by costly consequences for the abuser at a later stage. Indirect evidence supports this interpretation.

There has been concern expressed in the financial press and focus established in the accounting literature over rising levels of executive compensation. Individuals on the compensation committee, a sub-committee of the board of directors, collectively determine executive compensation and are responsible for maintaining the pay-for-performance standard, a concept that warrants further attention. This study examines the process of exaggeration of a group decision over individual beliefs and the impact of leadership upon a committee's outcome when making compensation awards. In an experiment with 98 subjects role-playing as compensation committee members, results show that in a committee of individuals where a coterie and a majority belief is present, group polarization occurs and the compensation results are exaggerated as compared to individual beliefs. The findings also suggest, though, that the appointment of a leader as chair of the committee, either in the majority or minority view, has a moderating effect on the group outcome. These results highlight and add to the literature the potential for agency costs in the group decision process that may be found in the executive compensation-setting environment.

This chapter analyzes the relationship between elected partisan political principals with partisan objectives and their regulators when those regulators can be captured by an interest group, namely the firm they are supposed to regulate. Independence of the regulator stabilizes regulatory policies and avoids much of the fluctuations induced by an exogenous political uncertainty on the electoral outcomes: a stabilization effect . However, independence also increases the cost of preventing regulatory capture: an agency cost effect . Even when both effects are taken into account, regulatory independence still increases ex ante social welfare. We also investigate how the independence of the bureaucracy affects electoral outcomes when political uncertainty is endogenized by modeling the decision of forward-looking voters who compare the policy platforms offered by competing political principals. Endogenizing political uncertainty reinforces the stabilization effect.

Scholars have begun to recognize the importance of integrating organizational issues into real options theory. In doing so, some argue that options are inappropriate for evaluating critical strategic investments. In a more in-depth analysis, we argue that the organizational form that an option takes has a profound effect on exercise decisions. When options are initially integrated, organizational elements such as routines and culture become increasingly intertwined over time, raising the cost of abandoning the option – in effect, pushing firms to exercise options. In contrast, initially isolated options become idiosyncratic and more costly to integrate over time – pushing firms to kill them. There are also reputational and social capital effects that may bias exercise decisions beyond the mere consideration of costs, leading to escalation or missed opportunities. Accordingly, firms must first be able to manage the associated organizational costs and minimize systematic bias in exercise decisions. Real options theory is moving away from the limitations of the financial options analogy and is increasingly integrated with strategy and organization theory. This shift requires that researchers consider issues such as intermediate organizational forms, external monitoring of exercise decisions, portfolios of competing options, and group process interventions.

Publisher Summary This chapter explains how the agency theory can be used to prevent a development of divergent interests between the management team and investors after a management buy-out (MBO). Agency costs are caused by increased costs of monitoring by the investor to overcome the problems of self-interest, risk aversion, goal conflict, and information asymmetry. The chapter focuses MBOs divested from foreign or local parent companies, of which the majority of the equity after the MBO is owned by venture capitalist. The chapter focuses on the agency costs of equity and debt by analyzing the monitoring role of venture capitalists, the goal congruence between the new shareholders, the financial unification, and the repayment of debt. These mechanisms motivate managers to look for efficiencies to protect the firm against the downside risks as well as for new market opportunities to use the firms' upside potential. Examples are efficiencies in investment programs, in cutting overhead cost, and in disposal of assets. The mechanisms reduce the agency problem by stimulating the agent to make decisions that are in the interest of the principal and result in an improvement of economic performance after the MBO.

This review evaluates the four major theories of corporate financing: (1) the Modigliani–Miller theory of capital-structure irrelevance, in which firm values and real investment decisions are unaffected by financing; (2) the trade-off theory, in which firms balance the tax advantages of borrowing against the costs of financial distress; (3) agency theories, in which financing responds to managers’ personal incentives; and (4) the pecking-order theory, in which financing adapts to mitigate problems created by differences in information. These theories are conditional, not general. It is easy to find examples of each theory at work, but otherwise difficult to distinguish the theories empirically. Large, safe firms with mostly tangible assets tend to borrow more. Firms with high profitability and valuable growth opportunities tend to borrow less. Each of these tendencies is consistent with two or more of the major theories of financing. It may be possible to devise sharper tests by exporting the theories to developing economies, where agency and information problems are more severe. Further progress in understanding corporate financing decisions will require a deeper understanding of agency issues when value-maximizing operating and investment decisions cannot be observed or verified. But managers are not just temporary agents motivated by immediate pecuniary compensation or perquisites. Managers specialize their human capital to the firm. Some recent research suggests how financing can support the co-investment of human and financial capital.

This paper identifies a new agency cost of intermediated contracting. A non productive intermediary can extract some rents when (a) the productive agent has some private information and (b) the intermediary’s sub-contract with the productive agent is not directly controlled by the top principal. We show that the intermediary’s informational rent is an increasing and concave function of the productive agent’s own informational rent.

We develop a dynamic general equilibrium macroeconomic model where a proportion of firms are credit constrained due to asymmetric information. In general, a macroeconomic shock has additional effects created by a reallocation of funds between credit-constrained and unconstrained firms, as they have different marginal productivities. We show, however, that the output response to shocks is not necessarily amplified and can be dampened by the presence of asymmetric information. This depends on the impact of the shock on the composition of external and internal funds for credit-constrained firms. (C) 2000 Elsevier Science B.V. All rights reserved., Partial financial support from CICYT grantd PB/95-0130 (Spanish Ministry of Education and Science) is gratefully acknowledged.

Publisher Summary This chapter provides an overview on principals and agents. An agency relationship between two individuals exists when the agent is authorized by the principal to make, modify, or cancel contracts with a third party in the principal's name. An agent differs from an employee by the fact that the activities of the agent are not monitored in detail. The principal does not give his agent contingency orders on how to handle each possible decision situation as he does to supervised employees. Some guidelines may be spelled out and the agent may be monitored to some extent, but the essential feature of the agency relationship is the freedom of the agent to determine activities and contracts independently. The power to act independently for the principal can be used by the agent for his own benefit. A contract makes the contractor liable for damages, but the legally determined financial compensation may not be a satisfactory alternative to specific performance. The contract could spell out the principal's desires for performance in each possible contingency.