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This study aims to examine the impact of minority investor protection mechanisms on agency costs. All relevant indicators of minority investor protection adapted from the World Bank’s annual ‘Doing Business’ reports, along with concentrated government ownership, are employed with a panel data sample of 135 Vietnamese listed firms during the period 2014–2018. It is found that the following mechanisms are effective in mitigating agency costs and hence agency problems at the firm level: 1) review and approval requirements for related-party transactions; 2) minority shareholders’ ability to sue and hold directors liable for their duties; 3) minority shareholders’ access to internal corporate documents; 4) investors’ rights to approve major corporate investment and sale of asset decisions; and 5) disclosure in annual reports of salaries, bonuses and other forms of remuneration to directors and management. Interestingly, board independence and controlling government shareholders are not confirmed to play significant roles in addressing agency problems. To the best of the authors’ knowledge, this is the first attempt at testing for the impact of minority investor protection mechanisms developed by the World Bank on agency costs at the firm level, hence providing empirical evidence for the adoption of the minority investor protection mechanisms promoted by the World Bank. This study also provides policy implications for selecting effective mechanisms to mitigate agency conflicts between controlling shareholders and minority investors in order to enhance the financial performance of firms in an Asian emerging market.

Effective corporate governance leads the way towards aligning the interest between managers and shareholders. Effectiveness of practicing the corporate governance of companies in Sri Lanka is debatable topic due to the variation between standard and actual practices. This study aims to examine the influence of board diversity on agency costs of companies listed in Sri Lanka as proposed by agency theory. The sample of this research consists of all companies listed in Sri Lanka, exclusive of bank and financial institutions which are practicing unique governance practices issued by Central Bank of Sri Lanka. The final sample consists of 180 companies during the period from 2013 to 2019. This study deployed panel regression analysis to test the relationship formulated in the hypotheses by using the EViews 9 software. The results showed that the board diversity-related variables such as separate leadership structure and presence of non-executive director on companies’ board are appeared to have significant influence on agency costs. Meanwhile, board size does not have direct impact on agency costs. The findings of this study regarding board diversity and agency costs have important managerial implications, that these findings are unlikely to the prediction of agency theory and best practices. Agency theory is not applicable to these companies, since the exiting corporate governance practices increase agency costs. The potential benefits of this study led to re-think the board of directors of the companies, managers, shareholder and the policymakers to re-organise the implementation of best practices.

Purpose This study aims to examine the impact of corporate governance mechanisms on financial and non-financial aspects of firm performance in medium and large-scale manufacturing firms in Ethiopia. Design/methodology/approach The cross-sectional survey and simple random sampling methods are adopted while the data collection is through a questionnaire that covers five corporate governance indicators consisting of the board independence, board effectiveness, shareholders role, internal audit effectiveness (IAE) and disclosure and transparency. The dimensions of firm performance were indicated by six firm performance indicators of customer and market (CM), internal process (IP), differentiation, efficiency, competitive position (CP) and financial (organizational) performance (OP). The covariance-based structural equation modeling (SEM) with the maximum likelihood parameter estimation technique was used to perform the data analysis. Findings A significant positive relationship has been found between the independence of the board of directors and firm performance (especially with respect to differentiation, OP, CP and IP). However, the board of directors’ effectiveness showed an unexpected result, significant negative effect on differentiation, OP, CP, CM and IP. The study also indicates a positive significant effect of disclosure and transparency on differentiation, CP and OP. However, the coefficient on the CM construct of firm performance is negative and significant. A significant negative linkage has also been revealed between IAE and two constructs of performance: differentiation and CP. One of the important findings of the study is that shareholders’ role has a significant positive impact on both board characteristics (board independence and board effectiveness) and firm performance (differentiation, efficiency, CP and OP). Research limitations/implications The study has two potential limitations. First, in comparison to prior studies, this study is based on a small sample size which limits the generalizability of the findings. Different scholars have suggested (Anderson and Gerbing, 1984, 1988; Iacobucci, 2010; Hair et al., 2019) that SEM requires a large sample size to test the hypothetical model. Thus, future research can further investigate the link between corporate governance and firm performance by using a larger sample size to achieve more reliable results. Second, the current study used a quantitative approach only, but prior studies (e.g. Ahrens and Khalifa, 2013) suggest a qualitative approach to more investigate and reach a very conclusive idea on corporate governance. The approach is currently receiving growing popularity in the literature. Practical implications The findings of the study would have measurable implications for different stakeholders who are in the position of supporting or regulating manufacturing firms. First, the findings give a clue about how a firm can design a good corporate governance system. Second, managers of the firm can get a hint or tip from the result that might help as input for designing strategies. Finally, it might help policymakers to understand and think about the very crucial role of active participation of shareholders in curtailing/reducing agency cost and enhancing firm performance apart from (beyond) the conventional corporate governance mechanisms (board of directors, internal audit, disclosure and transparency). Originality/value This study seeks to extend and contribute to the current literature in several ways. First, in contrast to previous studies, this study used both financial and non-financial performance measures and thereby providing new empirical insights relating to the non-financial performance measures. Second, this study provides a new result that the role of shareholders has a direct significant positive impact on board characteristics (i.e. board independence and board effectiveness) and firm performance. Finally, this study has come with a new insight that disclosure and transparency is a major driver of firm performance.

Corporate finance decisions, measurement of accounting profits and market valuations are invariably made within the framework of a taxation system(s). Previous research indicates both ambiguity over the influence of taxation on managers’ behavior and limitations in the ability of shareholders to process tax information. The establishment of the UK’s Real Estate Investment Trust (REIT) regime in 2006 allowed quoted companies to opt out of company level taxation. We examine the reasonableness of managers and shareholders’ responses i.e. their ability to process information. When compared with shareholders, managers demonstrated a greater knowledge of the legislation, and of its applicability. For example, managers appeared to pre-empt the effects of the legislation. This should also act as a warning of the potential downside of increased cooperation between tax policy makers and taxpayers in trying to make more appropriately formed legislation. Further, managers appeared to be willing to trade off the interests of shareholders for their own personal gain which is surprising given the visibility of the REIT conversion process. Although shareholders were willing to pay less in such instances, their apparent inability to prevent this behavior illustrates the limitation of shareholder control over managers’ behavior. We find shareholders can accurately assess the general effects of the legislation but were unable, when combined with company information, to identify specific companies likely to benefit from the legislation. Without any increase in shareholder sophistication, concerns exist over the effectiveness of shareholders in acting as monitors of managers’ tax decision making and decision making more generally.

PurposeThis study aims to examine the effects of board gender diversity on agency costs in non-financial firms listed on the Pakistan Stock Exchange (PSX).Design/methodology/approachMultiple regression analysis is used to determine the impact of board gender diversity on agency cost. The research used panel data consisting of 2,062 firm-year observations of 226 non-financial firms listed on the PSX from 2008 to 2019 to test the proposed hypothesis. In addition, the Blau and the Shannon indices were used to checking for robustness.FindingsThe results indicate that female presence on the board significantly reduces the agency cost and, hence, mitigates the principal-agent conflict. Moreover, consistent with the critical mass theory, it was found that boards with three or more female directors have a stronger impact on reducing the agency cost, as compared to two or fewer female directors on the board.Research limitations/implicationsThe sample was restricted to non-financial firms listed on the PSX only; therefore, the results reflect the attributes of Pakistan’s business environment. A similar analysis in the context of other countries may generate different results.Practical implicationsThe findings imply that female directors play an important role in reducing agency conflicts between shareholders and managers by enhancing monitoring through effective governance mechanisms. The policymakers, therefore, should focus on female career development and encourage professional training programmes to generate a fair, competitive environment for senior female management.Originality/valueThis study attempts to fill the literature gap in that no similar study covers the non-financial firms’ listed firms in Pakistan. The paper supports the reforms made by the code of corporate governance by making the placement of female directors mandatory on Pakistani corporate boards. Overall, support is provided for the view that regulators should favour gender quotas regarding the composition of the board management team of listed firms to reduce agency conflicts and gain shareholder confidence.

The effect of board diversity on organisational performance has continued to be given attention by policymakers, non-governmental agencies, and academic communities. It has been established that boardroom diversity enhances the corporate boards’ monitoring capacity and mitigates the agency costs, which positively influences the firms’ performance. Despite the advantages of constituting diverse boards, the corporate governance framework guiding the operations of such firms does not contain any specific requirement on board diversity. Hence, empirical studies need to stress more on the relevance of boardroom diversity to firms’ value in the Nigerian context. Therefore, this paper examines the effect of board diversity on financial performance of the Nigerian listed firms. The study utilised the balanced panel data of 70 firms for a period of 8 years (2012 to 2019) using a two-step system generalised method of moments (GMM) framework. This study indicates a positive and significant relationship of board gender diversity (BGD) and Foreign directors (FD), with financial performance. However, the effect of CEO financial expertise on the firms’ return on assets (ROA), return on equity (ROE), and return on sales (ROS) appear positive but insignificant. Consequently, the Nigerian listed firms should attach more value to constitute a smaller board size with a considerable number of female and foreign directors to maximise their performance.

Organization capital (OC) constitutes a firm’s unique, hard-to-mimic, hard-to-transfer culture, internal knowledge and language, policies and procedures, growth opportunities and information technology, brand name and any other aspects that are not directly related to the production process. In order to disentangle value enhancement from agency costs inherent in the OC, we calibrate systematic risk premiums from the loss of managerial OC rents by decomposing OC into: (1) portable economic rents in the form of disclosed executive compensation and (2) a strategic component comprised of undisclosed, non-portable OC rents mixed with agency costs. Shareholders in firms with high strategic component (not the portable component) earn an annual systematic risk premium of 4.6%. Disclosures revealing the breakdown between OC and agency costs in the strategic component (earnings surprises, managerial obfuscation and stock mispricing) as well as corporate governance eliminate this risk premium by revealing the OC rents in strategic component and increasing OC portability.

PurposeThe purpose of this study is to contribute to the debate in the literature about generalist CEOs by exploring the effect of board governance on CEO general managerial ability, focusing on one of the most crucial aspects of the board of directors, board size. Prior research shows that smaller boards constitute a more effective governance mechanism and therefore are expected to reduce agency costs.Design/methodology/approachThe authors estimate the effect of board size on CEO general managerial ability, using a fixed-effects regression analysis, propensity score matching, as well as an instrumental-variable analysis. These techniques mitigate endogeneity greatly and make the results much more likely to show causality.FindingsThe results show that firms with smaller board size are more likely to hire generalist CEOs. Specifically, a decline in board size by one standard deviation raises CEO general managerial ability by 15.62%. A lack of diverse experiences in a small board with fewer directors makes it more necessary to hire a CEO with a broad range of professional experiences. Furthermore, the agency costs associated with generalist CEOs are greatly diminished in firms with a smaller board. Hence, firms with a smaller board are more inclined to hire generalist CEOs.Originality/valueAlthough prior research has explored the effects of board size on various corporate outcomes, strategies and policies, this study is the first to investigate the effect of board size on CEO general managerial ability. This study contributes to the literature both in corporate governance and on CEO general managerial ability.

Understanding the association between quasi-indexer ownership and insider trading is important given the externalities that insider trading can impose on shareholders, the importance of quasi-indexers in the capital markets, and their mixed monitoring incentives. The prior literature has produced an inconsistent set of results regarding this association. These results are difficult to interpret because the association between them is likely endogenous, and prior studies have not employed effective identification strategies to address this issue. In this study, we examine the effects of quasi-indexer institutional ownership on insider trading using the plausibly exogenous discontinuity in quasi-indexer ownership around the Russell 1000/2000 index cutoff. Using both regression discontinuity and instrumental variable research designs, we find higher quasi-indexer ownership leads to less insider trading (both buys and sells) and less profitable sell trades. The effects for sells are concentrated among insider trades that, ex ante, are more likely to be based on private information. Our evidence on the profitability of buys is mixed. In addition, we find firms with higher quasi-indexer ownership are more likely to have and/or more strictly enforce blackout policies. Overall, our results suggest that quasi-indexers can reduce the agency costs associated with insider trading through their direct and indirect monitoring activities.

Purpose The purpose of the study is to examine the relationship between the board of directors (BODs) and the Shariah board (SB) and assess its impact on the financial soundness of Islamic banks (IBs). Design/methodology/approach The authors use a regression model to test the effects of the relationship between the BOD and the SB on the financial soundness of IBs by applying a panel data set of 61 IBs, covering 18 countries from 2008 to 2014. The dependent variable is the Z-score indicator. To test the robustness of the results, the authors use dependent variables other than the Z-score [A rating of Capital adequacy (C), Asset quality (A), Management (M), Earnings (E), Liquidity (L), and Sensitivity (S) (CAMELS)] for 2018. Findings The results show that meetings between directors and SB members significantly reduce the financial soundness of IBs. The relationship between the BOD and the SB increases conflicts of interest and agency costs. However, a representation of the SB at the BOD meetings and vice versa does not affect financial soundness. The Accounting and Auditing Organization for Islamic Financial Institutions and the Islamic Financial Services Board corporate governance standards do not require the presence of the SB representative at the BOD meetings or vice versa, which justifies the results. Practical implications This study attempts to fill gaps in the literature by investigating the impact of meetings between the SB and the BOD on the financial soundness of IBs across the world. The results suggest that the BOD’s frequent interference in the affairs of the SB can have adverse effects on IBs and should be avoided. Originality/value The authors depart from the previous literature by using three new characteristics that link the BOD to the SB. Methodologically, the authors use three new measures to evaluate this relationship and its effect on the financial soundness of IBs. This study is unique because it explores the comparative impacts of the presence of a SB representative at the BOD meetings and a director at the SB meetings and meetings between the two governing boards of IBs.

This research was conducted to examine whether agency cost can be influenced by the board of commissioners, audit committee, company size, and capital structure. This seeks to contribute to the literature of factors influencing agency cost in Indonesia. Agency cost exists because of some assymetircal information and conflicts between principal and agent. The study used descriptive method of which purposive sampling method was used in sample selection. The samples were selected from the top 100 largest wealth-creators companies in 2019 in Indonesia. Using the wealth-creators companies as the samples makes this research a unique one. The classical assumption test was conducted to check the relationship between variables. Data gathered were analyzed and interpreted using multiple regression analysisof which t-test and F-test were considered. The study revealed that agency cost was simultaneously influenced by the board of commissioners, audit committee, company size, and capital structure. Partially, this study found that board of commissioners and company size have siginificant influence on agency cost, while audit committee and capital structure have no influence on agency cost. The findings indicate that there are several factors that influences agency cost. Thus, agency cost can be minimized by proper monitoring by the presence of board of commissioner; while company size and capital structure trigger agency costs.

PurposeThis paper aims to examine whether agency costs predict disciplinary takeover likelihood for the UK listed companies between 1986 and 2015.Design/methodology/approachUsing survival analysis, the approach is to identify candidates for disciplinary takeover on the basis of Tobin’s Q (TQ), which is consistent with the approach advocated by Manne (1965). This study then examines how indicators of agency costs affect takeover likelihood within the set of disciplinary candidates.FindingsThis paper provides evidence of the effectiveness of TQ, rather than excess return, in identifying disciplinary takeover candidates. Takeover hazard for disciplinary candidates is higher for companies with higher levels of asset utilization and sales growth in particular. Companies with stronger agency problems are relatively less susceptible to disciplinary takeover.Practical implicationsGiven the UK context of the study, where anti-takeover provisions are disallowed and when compared to findings of US studies, the results imply some support for the effectiveness of an open merger policy.Originality/valueWhile the connection between takeover likelihood and the market for corporate control has been made in previous studies, the study adopts a more explicit agency theory framework than previous studies of takeover likelihood. A key component of the contribution follows from differentiating candidates for disciplinary takeovers from other forms of mergers and acquisitions.

We examine the impact of independent directors’ reputations on executive pay-performance sensitivity. Using hand-collected data from listed Chinese companies from 2012 to 2017, we find a positive association between independent directors’ reputations and pay-performance sensitivity that is more pronounced in companies with less concentrated ownership. Further, the results show that reputable directors have a stronger influence on pay-performance sensitivity when they sit on a remuneration committee, are in state-owned enterprises, and are in companies with higher agency costs. Our results highlight the monitoring role of reputable independent directors in setting effective executive compensation contracts.

The objective of this study is to examine the relationship between managerial ability and earnings classification shifting of firms listed in the Tehran Stock Exchange (TSE). The paper consists of a sample of 1,875 firm-year observations after applying systematic elimination sampling method during a period of fifteen years, from 2005 to 2019. This study used the multivariate panel data regression for testing the links between variables. The results of this study provide that there is a positive relationship between managerial ability and earnings classification shifting. The obtained results indicate that there is a negative relationship between managerial ability and real earnings management and no relationship between managerial ability and AEM. In addition, managerial ability mitigates the negative effect of earnings management on future firm performance. Furthermore, managerial ability affects its agency cost positively due to the reduction in earnings management. This paper contributes to developing management literature and financial reporting literature. The study focuses on links managerial ability and earnings classification shifting and agency cost in a developing country like Iran, and the results of the paper can fill distance theory and practice by empirical test. Furthermore, the results of this study indicate in an emerging market, namely, Iran, that has a political business environment among the other countries of the Middle East, managerial ability can release Iranian firms on economic sanctions and financial pressures. This paper is the first study of its type in Iran.

Many studies use country-specific evidence to investigate research questions of broad interest due to data availability or to exploit an exogenous event that allows identification. One such research stream largely examines Canadian directors' and officers' (D&O) insurance and finds that more coverage (i.e., higher limits) is negatively associated with financial reporting quality and positively related to litigation (accounting-related agency costs). However, the U.S. and Canada differ on key issues relevant to securities litigation and D&O insurance. Thus, we predict and find that premiums, rather than limits, provide information about U.S. accounting-related agency costs. Nonetheless, the incremental information provided by premiums about accounting-related agency costs is limited, and audit fees provide better information about these agency costs. Thus, although researchers argue for disclosure of U.S. D&O insurance information, the usefulness of such disclosures may be limited because audit fees are already disclosed. Our findings suggest caution in broadly generalizing country-specific studies.

PurposeThe author examines the role of board structure and institutional investors in dealing with the agency issues for the Indian firms by taking the data of NSE-500 nonfinancial firms for the period 2010–2019.Design/methodology/approachThe author applies dynamic panel data methodology to deal with endogeneity concerns prevalent in corporate finance variables.FindingsThe agency view is consistent with the board size in the context of India. The author observed that the board size has a harmful effect on agency cost. A larger board size may create a coordination problem, or CEO may find it easy to thrust his or her decisions on board. The author also noticed that firms should have sizeable institutional ownership, particularly pressure-insensitive investors, in equity as they can reduce agency-related issues.Originality/valueThis study focuses on one of the largest emerging economies, i.e. India.

Over the past few years, scholarly interest in corporate social responsibility (CSR) has been increasing. However, research on the relationship between CSR and firm performance has revealed a complicated relationship. In this paper, we argue that part of the basis for the generally positive relationship between CSR and firm performance might come from a reduction in agency costs. Relying on behavioral agency theory, we construct a model in which CSR moderates the impact of the agency problem on specific firm outcomes, including firm performance, the use of stock options, and goodwill. Based on panel data of publicly traded U.S. firms from 1999 to 2013, we find support for that model. These findings suggest the role of CSR in improving corporate governance efficiency through mitigating agency problems inside the firm.

We explore the role of female directors in mitigating CEO luck. CEOs are “lucky” when they receive stock option grants on days when the stock price is the lowest in the month of the grant, implying opportunistic timing. Our results show that board gender diversity significantly deters the opportunistic timing of option grants. The effect of board gender diversity is 17.19% stronger than that of board independence in reducing CEO luck. Board gender diversity plays an effective governance role, even more effective than board independence does. Our results support the benefits of board gender diversity in mitigating the agency cost.

PurposeThe purpose of this paper is to explore the impact of national culture on leverage speed of adjustment (SOA) across countries.Design/methodology/approachWe use a partial adjustment model to estimate the impact of national culture (assessed using Hofstede's six cultural dimensions) on leverage SOA.FindingsWe find that culture does significantly affect the degree to which firms deviate from target debt level and the speed of adjustment (SOA) of leverage. High power distance, individualism and masculinity are associated with a slower SOA, while high long-term orientation, uncertainty avoidance and indulgence result in a faster SOA. Additionally, cultural characteristics affect leverage SOA differently when firms are underlevered versus overlevered and when firms have small versus large deviations from the target level of debt. We suggest that these effects can be explained by agency motives.Research limitations/implicationsThe results of the study are based on available information for firms from 53 countries.Originality/valueThis study is, to the best of our knowledge, the first to examine the impact of national cultural traits on leverage SOA in international settings.

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.

We propose a supplementary way to assess the information content of a financial statement disclosure based on the comovement of asset returns in different markets in response to information that has price implications for both. The influence of a signal that strongly influences at least two asset markets measures a dimension of information content less clearly reflected in single‐market responses. We apply our method to debt covenant violation (DCV) disclosures. These are the outcome of a debt renegotiation when the covenant promises in a debt agreement to manage the agency costs of debt are broken. We find that stock and bond return comovement is highest one day before DCV disclosure and differs depending on whether the debt covenant is waived or not waived. We find that stock and bond return comovement in the days following a DCV disclosure decreases more for non‐waiver disclosures than for waiver disclosures. This supports the theory that a non‐waiver outcome shifts control rights and bargaining power to the creditors. Consistent with this theory, single‐market tests show that bonds with a non‐waiver disclosure versus a waiver disclosure earn positive excess returns following a DCV disclosure whereas the reverse is true for stocks.

This study analyzes the effect of bank CEO appointment structure and tenure on borrowers’ accounting practices and earnings management. Drawing on agency theory, we posit that agency costs are high...

This study examines the impact of directors’ famine experience on the corporate donation decision. We use a unique data set of 16,082 firm-year observations from Chinese listed firms to show that d...

We study how trade liberalisation affects the extent of corporate decentralisation using the World Bank enterprise survey in China. In particular, we examine the autonomy of production, investment and employment decision and the incentive compensation of CEOs of subsidiary firms after China's entry in the World Trade Organization (WTO). We show that subsidiary firm CEOs receive more decision autonomy and higher powered incentives when facing increased foreign competition in output market. In contrast, subsidiary CEOs receive less decision autonomy and flat incentive compensation when foreign competition in subsidiaries’ input market intensifies. When examining subsidiary CEOs’ autonomy in different decisions, we find that CEOs’ investment autonomy is more responsive to foreign competition than employment and production autonomy. We explain this difference through the agency cost angle by showing that firms whose CEOs with greater investment autonomy tend to spend more on managerial perks. Taken together, this paper sheds new light on how trade liberalisation reshapes firms’ decentralisation decisions in a multi‐tasking principal‐agent setting.

PurposeThe readability of annual reports is an important feature that determines the quality of communication between a firm and its stakeholders. Extant literature has demonstrated that readability characteristics of annual reports are crucial in facilitating the investor's ability to process and analyze information, resulting in higher firm performance and lower agency costs. This study examines the relationship between annual report readability, agency costs and the firm performance of listed financial sector companies in Oman.Design/methodology/approachUsing a sample of 150 firm-year observations of listed financial sector companies on the Muscat Securities Market (MSM) over the period 2014 to 2018, a panel regression analysis is used, along with the system generalized method of moments (GMM) estimation to address endogeneity concerns. The readability of annual reports is proxied by the length of the annual report, the Flesch reading ease and the Flesch–Kincaid index.FindingsThe ordinary least squares (OLS) results suggest that readability proxied by the length of the annual report has no significant relationship with agency cost, return on assets (ROA) or stock returns. The OLS results are confirmed through the system GMM estimation model for agency costs, Tobin's Q and stock returns. Easier-to-read annual reports measured by the Flesch reading ease demonstrate high asset utilization ratio and Tobin's Q. These results emphasize Flesch reading ease measure in explaining the economic significance of agency cost and Tobin's Q. In contrast, difficult-to-read annual reports are observed for firms with high ROA.Research limitations/implicationsThe study is limited to the financial sector. Its generalizability could be extended to a similar sector or countries with features similar to Oman. Future studies on readability could be extended to other sectors of Oman, and financial firms with easier-to-read annual reports show a high Tobin's Q, which reflects the confidence of investors in the stock market. These findings may encourage policymakers to regulate the readability features of annual reports and influence the reporting quality of financials and disclosures also including cross-country comparisons.Practical implicationsFinancial firms with easier-to-read annual reports show a high Tobin's Q, which reflects the confidence of investors in the stock market. These findings may encourage policymakers to regulate the readability features of annual reports and influence the reporting quality of financials and disclosures.Originality/valueWhile the study extends prior literature on readability, agency costs and firm performance, it is also one of the first to examine the financial sector of an emerging country, namely, Oman. The study supports the obfuscation hypothesis through the association of readability measure with agency cost. Unlike prior research that has focused on common computational linguistic literature, this study uses three proxies for readability to assess information quality.

This paper examines the private equity (PE) corporate governance model by bringing together insights from legal scholarship, management studies, finance economics, and government data. While the PE...

By employing the Chinese listed firm’s data from 2010 to 2017, this study explores the impact of share pledging on firms’ corporate social responsibility (CSR) performance. Empirical results indicate a negative relationship between share pledging and CSR performance. This effect is robust after using alternative measures and different regression methods, and also consistent after tackling the endogenous issues. Furthermore, we find that risk-taking and agency cost are two possible underlying mechanisms through which share pledging reduces CSR. In addition, CSR reduction caused by share pledging leads to poorer economic performance and lower market value of firms.

The topic of corporate cash holdings has received relatively little attention from academic researchers. However, this decision has always been at the center of interest of any company seeking to improve its performance. This article aims to examine the relationship between agency costs related to managerial discretion and cash holdings by Moroccan companies. In order to do this, we will mobilize both agency theory and free cash flow theory. To date, and to our knowledge, no research has been conducted on the cash flow of Moroccan companies in the light of agency theory. This study contributes to cash holdings research in Morocco by exploring the reasons for holding cash through a sample of Moroccan non-financial companies that are listed on the Casablanca Stock Exchange for a period of 12 years (from 2007 to 2018). This research uses econometric models based on a positivist approach with a hypothetical-deductive method. Our results show that there is a strong positive relationship between cash holdings and cash flow. It also turns out that the liquidity of these companies is significantly negatively affected by the debt leverage and the growth opportunities of the company.

We study the effects of a mandated increase in disclosure in a setting where managerial responses are particularly observable: mutual funds. We conjecture that mandating portfolio disclosure can harm some mutual fund investors. Portfolio disclosure imposes skill reassessment risks on fund managers which in turn translate into agency costs to investors, especially for funds characterized with high levels of ex-ante managerial skill uncertainty. Using a regulatory change that mandated more frequent portfolio disclosure as a natural experiment, we show that funds with high levels of ex-ante managerial skill uncertainty responded to the regulatory change with an increase in management fees and a decrease in risk taking behavior, relative to funds with low levels of ex-ante managerial skill uncertainty. These actions ultimately get transmitted to fund investors in the form of inferior net performance. Our findings shed new light on the costs of disclosure, as well as providing evidence on disclosure, agency, and governance issues of the investment management industry. * Mailing Addresses: Teodor Dyakov, Department of Finance, Faculty of Economics and Business Administration, VU University Amsterdam, 1081 HV Amsterdam, E-mail: t.dyakov@vu.nl; Jarrad Harford, Department of Finance, Foster School of Business, University of Washington, Seattle, WA 98195-3226, USA, E-mail: jarrad@uw.edu; Buhui Qiu, Discipline of Finance, The University of Sydney Business School, The University of Sydney, NSW 2006, Australia, E-mail: b.qiu@econ.usyd.edu.au. We would like to thank Ying Gan, Yaniv Grinstein, Joshua Madsen, Christopher Polk, Mathijs van Dijk, session participants at 2015 Financial Accounting and Reporting Section (FARS) Midyear Meeting, and seminar participants at Erasmus University and VU University Amsterdam for helpful comments and suggestions. All errors are our own.

PurposeThe purpose of this article is to analyze the effects of accruals-based earnings management (AEM), International Financial Reporting Standard (IFRS) adoption and stock market integration for firms that belong to Latin-American Integrated Market (MILA).Design/methodology/approachThe GMM estimator was used according to Arellano and Bover (1995) for panel data on a sample of 478 non-financial companies between 2000 and 2016. Multilevel mixed models was used for the robustness analysis.FindingsAEM practices significantly and dynamically reduce agency costs. This result suggests companies use positive discretionary accruals to hide true agency costs and avoid shareholders monitoring, while negative discretionary accruals are ways to expropriate wealth and increase agency costs. This result implies that firms use AEM as a predetermined strategy to weaken corporate governance. The IFRS adoption and MILA implementation reduced agency costs. However, only IFRS adoption had the capability to mitigate the effects of AEM on agency costs.Originality/valueThese results reveal AEM constitutes a practice that managers use to weaken firms’ corporate governance and expropriate wealth from shareholders. These practices have effects at short-run and long-run. However, the IFRS adoption and market integration represented by MILA are mitigating factors for agency costs. These results have relevant implications for firms’ corporate governance because they guide investors and shareholders to strengthen corporate control and monitoring on business decision-making. These results also are relevant to policymakers because they orient the financial policies design to strengthen the benefits of IFRS and MILA.

PurposeThis article analyzes the effect of International Financial Reporting Standard (IFRS) 8 on the informational content of segment data. It aims to assess the change in quality of the financial analysts' and the shareholders' information environment due to the new segment reporting standard to verify the International Accounting Standards Board’s (IASB) expectations and the conclusions of its post-implementation review.Design/methodology/approachBased on a sample of 250 companies listed on Euronext Paris in France, a country with poor legal protection for shareholders, over a nine-year period, the authors test whether the new standard makes the financial analysts' forecasts more accurate and reduces the implied cost of equity capital.FindingsThe findings show that IFRS 8 partially improves the informational content of segment data, partially supporting the outcome of IASB. The management approach may have forced some firms to change their segmentation to provide a more economic view of the business. The poor legal protection for shareholders in France may explain this result.Research limitations/implicationsDue to proprietary and agency costs, firms may withhold segment information whatever the standard used.Practical implicationsThis study contributes to the ongoing debate about IFRS 8 and may interest financial statement users and the international standard-setter for such a criticized standard.Originality/valueThe results contribute to the segment reporting literature by addressing the partial improvement of information environment under the managerial approach in a country with lower investor protection.

The purpose of this paper is to examine the link between corporate governance, ownership structure and agency cost in Sri Lanka. The present study uses the regression model to analyse data for a sample of 150 firms listed in the Colombo Stock Exchange (CSE) for the financial years 2014 to 2018. The empirical results show statistically significant and positive associations between board size, CEO duality, managerial ownership and agency cost proxies (i.e., asset turnover and expense ratio). The results also show a positive and significant relationship between the independent directors and asset turnover (though statistically insignificant with expense ratio), suggesting that, entrenched independent directors employ lower conflict of interest in order to reduce the agency cost. Nonetheless, ownership concentration, was statistically insignificantly associated with agency costs, this paper provides support for such a view in Sri Lankan context. This study contributes to the literature on the on the association between corporate governance, ownership structure and agency costs. The findings may be useful for financial managers, investors, financial management consultants, and other stakeholders.

Using data of Chinese A-share non-financial listed companies spanning years 2003–2018, we examine whether a firm’s business strategy that deviates from industry conventions influences corporate gov...

We examine the within-firm resource allocation and restructuring outcomes at firms violating debt covenants. Using establishment-level data from the US Census Bureau, we find that covenant violations are followed by reductions in employment, investment, and more frequent establishment closures among violating firms’ noncore business lines and less productive establishments. These changes are concentrated among establishments at which manager-shareholder agency costs are pronounced and when key lenders have industry experience. Our findings suggest that enhanced creditor control reduces managerial agency costs and encourages a more efficient allocation of resources within the boundaries of firms in technical default.

Using a sample of Chinese listed companies, we investigate the impact of anti‐takeover provisions (ATPs) on the cost of debt. The results show that ATPs increase the cost of debt, which is contrary to findings based on US data. Moreover, executive ownership enhances the positive relationship, while hiring a reputable auditor attenuates it, indicating an agency channel. We further examine the relation between agency costs and ATPs and confirm that ATPs aggravate agency costs, leading to detrimental effects for debt borrowers. Our findings are robust to controlling for potential endogeneity issues and other robustness checks.

Purpose This study aims to shed light on the effect of corporate social responsibility (CSR) on the cost of debt. It also investigates whether audit quality affects the cost of debt incurred by socially responsible firms. Design/methodology/approach Based on a sample of French non-financial companies over the period 2005 to 2016, this paper uses panel data regressions. This paper re-estimates the model using Newey-West standard errors and the weighted-least-squares method. For further robustness, this paper runs instrumental variable regressions using the two-stage instrument variable method (two-stage least square). Findings The results show a negative relationship between CSR performance and the cost of debt, suggesting that financial institutions are likely to apply preferential costs for socially responsible firms. Financial institutions reward socially responsible companies as they recognize the potentiality of CSR to reduce firm risk and enhance its reputation. The findings also show that the perceived audit quality, along with CSR performance, are relevant to banks in the pricing of debt. The incremental audit quality, attributable to audits by the Big 4 auditors, decreases the cost of debt for CSR firms. Big 4 auditors are expected to, simultaneously, play information and insurance roles, thereby enhancing the firm risk profile. The results are robust to alternative audit quality measures (i.e. audit fees). Practical implications This study has important implications for managers and banks. Managers will be able to understand the effect of CSR on financing costs with relevant implications for strategic financing planning. Firms are also encouraged to signal their commitment to maintain a high-level quality reporting and reduce agency costs through their expenditure in auditing (i.e. hiring a large well-known audit firm). Moreover, this study sensitizes banking institutions to encourage the concept of socially responsible finance and consider soft information (i.e. involvement in societal issues, corporate citizen, trustworthiness, integrity and non-opportunistic behavior), as part of the credit decision-making and debt pricing process. Originality/value This study extends the literature on CSR and the cost of debt. Unlike prior studies, this paper focuses on the debt-pricing effects of audit quality for CSR firms. Audit quality is deemed to be an important governance feature that is likely to constraint opportunistic behaviors (i.e. CSR diversion) and play information and insurance roles to lenders. Audit quality (perceived or real), along with CSR performance, are associated with lower costs of debt.

This study examines the role of corporate governance mechanisms in the handling of cash reserves among firms in the ASEAN region. A panel regression was employed along with the Generalized Method of Moments approach on a sample of 648 listed firms from the ASEAN markets for 2005–2015. We documented that strong governance mechanisms, including a lower managerial ownership, a higher proportion of board independence and founder-Chief Executive Officer (CEO), positively impact cash holdings (CH), indicating lower agency cost and supporting the interest alignment hypothesis. In contrast, higher level of managerial and board ownership, bigger board and dual leadership structure negatively affect CH, supporting the entrenchment hypothesis. The negative effect of managerial entrenchment on CH is mitigated with a higher proportion of independent board and founder-CEO. Robustness tests show that CEO-duality becomes more important while founder-CEO becomes less important in countries with weak investors’ protection. These findings support the idea that a strong governance mechanism plays an important disciplinary role to mitigate the effect of agency conflicts on the cash management policy.

This paper investigates the consequences of removing the requirement from Australian corporate law that dividends can only be paid out of retained earnings. Using a difference-in-difference design, I find that firms with negative retained earnings and more volatile earnings increased dividends after the law change, consistent with the arguments of proponents of the law change. However, I further find that the law change is associated with a significant increase in cost of debt, decrease in debt maturity and increased reliance on bank debt. These results are consistent with increased agency costs of debt after the relaxation of dividend restrictions.

This study aims to determine the effect of managerial ownership on agency costs in textile companies listed on the Indonesia Stock Exchange (BEI) for the 2014-2018 period. This is to determine the effect of institutional ownership on agency costs in textile companies listed on the Indonesia Stock Exchange (BEI) for the 2014-2018 period. This research is quantitative research. The method used by the writer in analyzing the data in this research is descriptive statistical analysis. In this study, researchers used secondary data in the form of company records on financial reports related to this study. The results of this study are multiple linear regression equations showing each independent variable to the dependent variable. The value of α is -0.104, which indicates that agency costs decrease by -0.104 percent if managerial ownership (X1) and institutional ownership (X2) are equal to zero. The value of β1 is 0.346 which indicates that for every 1% increase in managerial ownership, agency costs will decrease by 0.346% assuming the other variables are constant. The value of β2 is 0.267 which indicates that for every 1% increase in institutional ownership, agency costs will decrease by 0.267%, assuming the other variables are constant.

Bank-owned life insurance (BOLI) is life insurance purchased by bank holding companies (BHCs) for key employees, whose proceeds can be shared by the company and employees’ heirs. We investigate reported benefits of purchasing BOLI to shed light on the dramatic increase in BOLI assets using a sample of 2040 firm-year observations from 2004 to 2013. We document that a BHC owning BOLI enjoys an average annual earnings increase of $12.5 million and an estimated annual tax shield of $3.4 million. This tax shield is nearly twice the size of average total CEO compensation. We provide empirical evidence that BOLI complements other forms of executive compensation. We empirically test potential agency costs associated with using BOLI as compensation but find no evidence of such costs. Further investigation shows that BHCs use BOLI to attract talented executives and benefit shareholders. We conclude that the significant benefits documented in this study provide convincing rationale for the increasing use of BOLI in recent years.

We study the impact of marital property legislation passed in the US South in the 1840s on households’ investment in risky, entrepreneurial projects. These laws protected the assets of newly married women from creditors in a world of virtually unlimited liability. We compare couples married after the passage of a marital property law with couples from the same state who were married before. Consistent with a simple model of household borrowing that trades off agency costs against risk sharing, the effect on investment was heterogeneous. It increased if most household property came from the husband and decreased if most came from the wife.

PurposeThe purpose of this paper is to examine whether the presence of returnees serving on the audit committee affects auditor choice in emerging markets.Design/methodology/approachUsing a logistic model, this study tests the relationship between the presence of returnees in the audit committee and auditor selection and how this relationship varies with the level of agency costs. The authors also perform several other additional analyses to ensure the robustness of the results, including propensity score matching, Heckman’s two-stage model and change analysis.FindingsUsingA-share listed companies in China from 2008 to 2016, the authors find a positive association between the presence of audit committee returnees and a demand for high-quality auditors and such association is strengthened in firms with a higher level of agency costs. The authors further find that discretionary accruals and the incidence of financial restatements are lower in firms with audit committee returnees.Research limitations/implicationsAlthough this study focuses on audit committee members with foreign study or foreign work experience, it remains to be seen if similar effects could be achieved through foreign ownership or work experience with foreign customers or suppliers.Originality/valueThis study provides evidence on a new channel of international knowledge spillover through which the emigration of talent increases board monitoring by demanding high-quality auditors in an emerging economy.

We study the impact of stronger shareholder control on bondholders. We find that the passage of shareholder-sponsored governance proposals causes a decline in credit default swap spreads, indicating a net positive effect on bondholders. Evidence suggests that the direct benefit of stronger shareholder control, through the “management disciplining” channel, is larger than the combined adverse effects of directly escalating shareholder-bondholder conflict and indirectly exacerbating exposure to shareholder opportunism. Results are stronger for firms with existing high levels of shareholder-bondholder conflict and for proposals that mitigate managerial entrenchment without exacerbating risk-shifting. Finally, stronger shareholder control improves credit ratings and operating performance in the long-term.

This research aims to investigate the level of agency costs faced by the universities in the UK, and how these costs impact the performance of these universities. A sample of 118 government-funded universities has been selected to collect financial data regarding various proxies of agency costs and quality of education. The research has utilised a multivariate regression model and t-tests to study the impact of agency costs on the quality of education in the UK universities. The results costs indicate that the UK universities suffer from extremely high level of agency costs however, the impact of these costs on the performance of these universities is contrary to their impacts on performance of the organisations in other sectors, that is, these costs positively contribute to the quality of education in these universities.

Corporate governance disclosures form a key part of a company’s non-financial reporting. Several studies consider the determinants of corporate governance reporting, including external factors such as country-specific legislation and scandals, and internal factors such as financial performance, size and culture. Others consider the consequences of corporate governance reporting, using simple proxies for corporate governance mechanisms such as board composition characteristics to analyse the impact on financial reporting quality and company valuation. Yet the determinants and consequences of corporate governance reporting may be interlinked, and many quantitative studies fail to consider these links and their multiple effects adequately. Poor financial performance, for example, can be both a determinant and a consequence of the underlying governance mechanisms that corporate governance reporting aims to capture. The framework provided in this paper considers both the determinants and consequences of corporate governance and likely links between them, and also considers internal corporate governance mechanisms and the measures that are used as their proxies. In combining these three aspects of corporate governance and showing potential links, the framework offers insights into future research opportunities. The framework can be adapted to any country or organisational setting and also offers the opportunity to consider theories other than agency theory when studying corporate governance disclosures.

Although corporate governance literature recognizes the influence of acquired social ties between CEOs and directors, innate social ties are hardly explored. To extend this literature, this study examines how CEO–board surname ties influence agency costs. Drawing on social identity theory, we first develop the argument that CEO–board surname ties result in increased agency costs. We then employ agency theory to examine the boundary conditions under which such directors are less likely to act as group members of surname ties. Specifically, we consider three key governance tools as such conditions, namely, monitoring by shareholders, aligning directors’ interests with firm value, and aligning supervisors’ interests with firm value. We find empirical support for our arguments by using a sample of 16,926 listed firms and 165,287 directors in China from 2005 to 2015. We discuss the contributions to corporate governance literature and elucidate the practical implications of our findings.