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The founder of a start‐up (principal) who has a project with uncertain returns must retain and incentivize an agent using promise of future payments and information gathering. The agent's effort incrementally advances production and such advance is a prerequisite for gathering new information. The principal decides how much information to gather based on these incremental advancements. The principal faces cash constraints. The agent's outside option is large relative to his effort cost. Equilibrium features one of two outcomes: immediate learning, whereby the agent's compensation is low, learning is immediate and retention is possible only conditional on the project being of high quality; or gradual learning, whereby the agent's compensation is high, learning is gradual, the agent never quits and effort is inefficiently high.

Product failure resulting from sourcing supplier’s defective component has compelled a brand owner to enhance quality management, especially when the supplier has informational advantage. In this article, we examine a brand owner’s problem of screening a certain supplier’s inherent quality level with an attempt to induce supply chain partners’ quality efforts using the warranty contract based on information acquired from inspection technology. A supplier’s inherent quality level is herein determined by the private information held by the supplier and is typically characterized as an uncertain variable. The optimal warranty contracts and the expected profits of the brand owner and the supplier are derived from four different scenarios under the framework of uncertainty theory and principal–agent theory. We find that under the condition of pure double moral hazard or pure adverse selection, the first-best outcomes can be achieved without incurring agency cost under the designed contract. However, double moral hazard combined with adverse selection often leads to underinvestment in quality efforts as the supplier can shirk by misreporting her type. Consequently, we present the menu of warranty contracts to screen the supplier’s private information. Finally, we provide empirical managerial recommendations on mitigating potential adverse impacts caused by information asymmetry, supported with numerical investigations.

Using a sample of China’s A-share listed companies from 2012 to 2019, this paper studies the impact of employee stock ownership plans (ESOPs) on corporate financialization. We find that the implementation of ESOPs has a significant inhibitory effect on corporate financialization, and a series of robustness checks indicate that the conclusion is valid. The mechanism tests show that ESOPs decrease corporate financialization by reducing management agency costs and improving internal control. Heterogeneity analyses indicate that ESOPs in firms with higher financing constraints, a lower external audit quality, and higher proportions of executive shareholdings and self-funded employee equity have a much stronger decreasing effect on corporate financialization.

Firms compensate managers to maximize shareholder value, yet these same incentives affect bondholder risk. We investigate the relation between executive equity pay and the cost of debt. Our findings indicate a “u-shaped” relation between bond yields and equity pay. These results are consistent with the notion that bondholders prefer a moderate amount of executive equity pay and above or below that level, bondholders increase yields to protect their interests. These findings suggest that moderate levels of equity pay mitigate the agency costs between firm shareholders and bondholders.

Despite the advantages of debt, a significant number of firms that have an established leverage policy deliberately become all-equity. These firms eliminate a substantial amount of long-term debt as the average firm’s leverage ratio is approximately 30 percent at the year-end prior to debt elimination. Firm-level “shocks” such as CEO turnover and changes in credit ratings cannot explain the dramatic recapitalization decision. Consistent with the tradeoff theory, firms that eliminate debt have lower benefits (less tax shield benefits, agency costs) and higher costs (probability of financial distress, access to capital markets, etc.) of leverage in the three prior years compared to a matched sample. We also find that the factors influencing the decision to eliminate all debt is different from those to significantly reduce leverage or to have very low debt levels. Firms primarily finance the approximately $70 million of average long-term debt eliminated using proceeds from sales of relatively unproductive assets and from equity issues. Interestingly, over half of these firms issue significant amount of new debt within three years of becoming all-equity. Firms with lower liquidity and non-debt tax shields, higher potential overinvestment agency costs, and those that issue equity at the debt elimination year are more likely to relever quickly.

Firms avail themselves of external finance to manage obligations to pay dividends, along with other commitments. Indian firms, which have significant ownership concentration, present a unique opportunity for analyzing the influence of promoter holding on financed dividend payouts. This study also analyzes the dependence of standalone firms (i.e., those that are not part of a business group) on these financed dividends along with the firms in business groups. The study asserts that firm affiliation affects the decision on the type and extent of external capital used to finance payout. Promoter holding has a positive impact on debt as well as equity-financed payouts at standalone firms; the relationship is nonlinear and a higher proportion of promoter holding has a constraining effect on such payouts, supporting the agency cost theory. The size of the firm plays a significant role in firm decisions about financed payouts. Firms with lower operating cash flows and high leverage have a higher tendency to finance their payouts.

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.

Using hand-collected governance data and a two-stage least squares approach to control for the endogeneity of firm governance structure, this paper shows that private investments in public equity (PIPE) issuers with higher board independence grant investors lower price discounts and experience improved announcement effects, improved long-run operating and stock performance, and increased investment. Board independence also encourages issuers to place more shares with venture capital investors, and fewer shares with managerial investors. These findings suggest that strong independent governance can mitigate the agency costs inherent in PIPEs.

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.

Legal systems around the world apply various strategies to mitigate agency costs between controlling and minority shareholders. A systematic review of the transnational law on the loyalty and care obligations of controlling shareholders reveals various doctrinal choices. This study aims to uncover the evolution of these choices by employing a law-in-context methodology. Accordingly, it seeks to explain the differences in governance selections by exploring the cultural, historical and socio-economic backgrounds of the particular legal systems in which organisations and decisions are embodied. I conduct a macro-level inquiry which focuses on the cultural environment and business history development to understand different doctrinal designs. In particular, I argue that those dissimilarities are a result of unique cultural-non-formal norms of corporate governance regarding the protection afforded to shareholders’ interests and they correspond to the historical development of the law of corporate groups across nations. As the macro-level investigation indicates, any initiative to globally converge corporate law and governance should be carried out with caution because it may distort the delicate normative equilibrium represented in a given jurisdiction.

In finance, capital structure decisions are crucial due to their impact on the value of a firm. Some theories assert that the value of a firm is irrelevant to those decisions. However, there is a growing literature that criticizes this idea. Those studies are constructed on some modern theories which called trade-off theory, agency cost theory, signaling theory, and pecking order theory. This paper investigates the relationship between optimal capital structure and capital structure components. The annual data gathered from 195 firms traded in Borsa Istanbul for the period 2011-2020 is used. The fast calibrated additive quantile regression approach is chosen because of its superior properties. In that method, there is not a strong assumption about the functional form of the relationships between the dependent variable and the explanatory variables. The results indicate that the relationships between the debt ratios and the capital structure components differ for each quantile and these relations are nonlinear. Furthermore, evidence is found that the relationships might be explained with the modern theories of capital structure.

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 current study seeks to investigate the relationship between ownership structure concentrations and commercial banks financial performance in one of emerging market (Bahrain). The current study employed panel regression analysis from 2015-2019 estimate the relationships between dependent and independent variables. The findings revealed that there is a positive impact of family, government and institutional ownership on financial performance measured by return on equity. Meanwhile, there is negative impact of family and institutional ownership on financial performance measured by earnings per share and a positive relationship with government ownership. The findings confirmed that the corporate governance implementation and a good ownership structure play a vital role in firm’s financial performance through reducing the agency cost. However, the current study suggests for future researches to examine other dependent and independent variables with extension the study duration and tackles other uncovered sectors in this study.

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 authors investigate the impact of governance on the leverage of East Asian firms in the financial crisis context, in order to understand the puzzle whether debt acts as a substitute for governance or an outcome of the governance mechanism.Design/methodology/approachThe authors use 86,030 firm-years and the country-level governance data from eight East Asian countries over the period 1996–2017. The authors employ the fixed effects (FE) model, in the main analysis and the weighted least squares model, as a robustness check in order to compare the two competing hypotheses of agency theory, substitute and outcome models.FindingsThe authors’ results show that debt acts as a substitute for governance before the GFC, but during and after the GFC the picture changes. Namely, debt acts as an outcome of the governance mechanism during the GFC and its aftermath. Since during financial downturns both agency costs increase, and information asymmetry widens, firms in poor-governed countries may be reluctant to increase their leverage in order not to face financial distress and additional restrictions. Thus, the results imply that the use of debt as a tool to mitigate agency conflicts and a substitute for governance strongly depends on the environment that the firms operate and the general macroeconomic conditions, such as facing a financial crisis or not.Research limitations/implicationsThis study provides an interesting case of the firms' capacity to raise money during a crisis and that governance plays an important role in borrowing activities of firms. This will undoubtedly help motivating owners and policymakers for improving governance. The authors’ findings may be useful for policymakers to develop policies considering the adverse effects caused by exogenous shocks. This is crucial because the severity of GFC as a shock seems to change the macro and institutional environment that firms operate. While the authors properly address the research hypotheses using country governance data, future research may employ corporate governance data to attain firm-level results by testing two competing hypotheses.Originality/valueThere are several important areas where this study makes original contributions. First, while Tsoy and Heshmati (2019) focus on the dynamics of capital structure for only Korean firms, the authors extend the sample including eight East Asian countries considering the impact of country governance on capital structure policy. Specifically, this study is the first in using the robust country governance data, which differs by country and year, in the crisis context. Next, the authors investigate both the AFC and GFC to compare whether these two crises have different effects on capital structure policy of East Asian firms. Finally, the authors aim to understand whether leverage is used as a substitute for governance or an outcome of governance mechanism considering recessions.

The effect of family control, agency cost and financial risk on firm value in company listed on the IDX. Three independent variable this research is family control, agency cost and financial risk and dependendt variabel is company value, and control variable is propability. The sample of this research consisted 100 companies, and technique using rendom sampling method. The result this research indicate that family control has a negative and significant effect on firm value. Agency cost and financial risk do not effect the firm value. And probability has a positive and significant effect on firm value

Refereed/Peer-reviewed Growing public concerns about sustainability and adopting environmentally responsible practices increase risks as well as opportunities for firms and banks. It is unclear whether being environmentally responsible matters for unlisted firms, which are significant contributors to the degradation of the environment but which are not under strict scrutiny like public listed firms. Using a sample of 3915 firms from developing economies, we investigate whether the superior environmental performance of unlisted firms leads them to better loan conditions. After controlling for endogeneity and sample selection bias, we find that firms with better environmental performance received approximately 6.4% higher loans (as a ratio of total sales) and that this effect is more prominent in small and medium firms. This finding supports an information asymmetry view of agency costs. Our results, however, show that environmental performance does not affect loan duration and collateral requirement, indicating no spillover economic effect of corporate environmental performance on loan conditions. This partially supports a new perspective of legitimacy theory in relation to the ‘greenwash strategy’. Overall, our study shows that strategically engaged environmental activities that are integrated with core business objectives represent an important business strategy for firms to enhance credit access.

This article is about agency relationship which formed due to the delegation of part of the powers of shareholders to employees. Also, this article is about the emergence of an agency problem which is aggravated by behavioral and environmental factors. The main reason of the agency problem is the separation of ownership from control. The divergence of interests between owners and managers leads to an increase in agency costs in this area. The central issue in the theory of agency relations is agency costs. The purpose of the study is to analyze the history of the development of the theory of corporate governance and the theory of agency relations. The relevance of the agency problem and the problem of corporate governance lies in the study of theoretical and practical research of agency costs, sources and factors which influence on the investment activities of the company. As a result of the study, the emergence and formation of the concept of agency costs were considered

The study examines the relationship between stock liquidity and the firms' use of short‐term debt. In addition, this study examines the impact of agency costs on this relationship and also documents whether large shareholding acts as a transmission channel through which stock liquidity may influence the use of short‐term debt. The study is based on secondary financial data of non‐financial Indian companies obtained from Center for Monitoring of Indian Economy Prowess database, pertaining to a period of 18 years (2000–2018). This study employs two‐step generalized method of moments (GMM) techniques to arrive at results. Results of the study confirm that firms' use of short‐term debt is negatively associated with stock liquidity. Additionally, we found that this relation is more pronounced for firms subjected to severe agency problems. We also find that large shareholding acts as a transmission channel through which stock market liquidity may influence the use of short‐term debt.

PurposeSmall- and medium-sized enterprises (SMEs) depend on a large measure on commercial banks for external capital, and US SMEs are increasingly experiencing bank credit constraints and resorting to costly alternatives. The purpose of this paper is to investigate the impact of lender organizational complexity on SME financing shortfalls. In particular, it examines the credit shortage effects associated with the SME's reliance on bank holding company (BHC) owned, as opposed to independent, lenders.Design/methodology/approachBuilding on agency–theoretic rationales, the authors posit that both hierarchical and horizontal complexity associated with present-day BHC structures will diminish an affiliated bank's ability and willingness to properly underwrite SME credit needs. Consequently, they hypothesize that SMEs whose commercial lenders are BHC affiliates are likely to experience greater credit shortages. This hypothesis was tested using exhaustive financial data from a large and nationally representative sample of US SMEs.FindingsGreater SME reliance on loans from BHC lenders was found to be associated with a greater use of late trade–credit payments. The latter is an expensive form of financing and a generally accepted indicator of shortages in conventional (and cheaper) bank credit.Originality/valueDespite the evolution toward more complex bank organizational forms, especially among community banks, the implications for SME lending are not yet fully understood. This paper's contribution is to offer a first examination of the impact of post-deregulation BHC structures on SME financing shortfalls.

PurposeThe purpose of this study is to examine the relationships between leverage and firm’s performance in Malaysia by framing the relationship under the tradeoff theory and agency cost theory.Design/methodology/approachBased on insights drawn from the existing literature, we opted for fixed effects and system two-steps GMM models to establish the hypothesized relationship between leverage and performance. We analyzed 528 nonfinancial firms listed on the Bursa Malaysia Stock exchange for the period of 12 years (2005–2016).FindingsThe outcomes show that the leverage ratio improves the firm performance, consistent with leverage serving as an effective strategy in constraining managers from building their personal empire, revealing a proportionately greater benefit for Malaysian firms than the cost to debt financing. The authors also find that a positive relationship between leverage and firm performance switch to the negative when the level of leverage reaches beyond the optimal level. Consequently, switching from positive to negative indicates that debt has a twofold (nonlinear) impact on firm performance.Practical implicationsOur research provides several implications to potential stakeholders. For investors, firms having lower leverage ratios could achieve superior performance, thus investing in corporations pursuing higher performance. Managers should therefore strive for achieving higher performance to meet the needs of investors and shareholders. From the researcher’s perspective, our research suggests the need to go away from the searching linear association between leverage and firm performance and the relevance of nonlinear correlation. Moreover, our research can help managers to understand how their lender relates to their debt to assets ratios. Thus, they can design an optimal level of leverage that not only improves the firm’s performance but also reduce the associated costs.Originality/valueTo the best of the author’s knowledge, this is the initial attempt in the context of Malaysia that documents evidence indicating that the lower leverage is likely to create value for shareholders while a higher debt ratio reduces firm profitability.

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.

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.

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.

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 examine whether the combination of agency costs of debt and managerial optimism in high-tech IPOs creates inefficient R&D investment, thus undermining corporate value. We find that high-tech IPO...

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.

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.

We study the effects of managerial overconfidence and agency costs on cash holdings of blockchain firms, where the overconfidence is defined as a cognitive bias that a manager will underestimate volatility in an uncertain environment. We develop a real-options game model that incorporates both overconfidence and agency costs. The theoretical results show that future investment opportunities are necessary for holding cash when agency costs are within the firm. Expected returns from blockchain projects decrease with managerial overconfidence. The level of corporate cash holdings increases with overconfidence and decreases with agency costs. Using the data of Chinese listed firms from 2010 to 2019, we find that the regression results are consistent with our theoretical findings. Moreover, we find that the blockchain firms’ cash holdings are higher than their peers. Our results shed some light on the impacts of behavioral characteristics on cash holdings.

Agency cost theory suggests that a firm’s financial leverage is important to improve organizational efficiency. Using data of industrial companies of three biggest economies, this study analyzes ho...

We examine the extent to which shareholders strategically allow a weak governance structure in response to increasing competition pressures in the product market. We treat acquisitions by rival firms as shocks that increase threats in a competitive product market. We find that firms adopt greater entrenchment provisions when there are greater competition threats. Moreover, firms with high institutional ownership – especially by dedicated investors – and​ board independence within the compensation committee are particularly aggressive, which is consistent with our theory that aggressive behavior represents a strategic decision by shareholders. Finally, we find positive relationship between the adoption of entrenchment provisions and firm’s future performance, but only for the adoption under relatively severe competitive pressures.

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 paper examined impact of agency costs on financial performance of listed consumer goods companies in Nigeria. The research utilized documentary data collected from annual reports of consumer goods companies in Nigeria for the period of 2007-2016. A panel data regression technique was employed. The study reveals inverse relationship between agency costs and financial performance, indicating that agency costs will lead to a decline in financial performance, if not properly managed. Based on this result the study recommends that managements of listed consumer goods companies in Nigeria should lay down effective rules and regulations that will ensure avoidance of keeping free cash flow at managers’ discretion so that agency costs could be minimized and effectively managed. This could be achieved by complying with the suggestions by free cash flow hypothesis paying it out in the form of cash dividend or committing the firms in to more financial obligations which requires periodic interest payments. There should be critical reviewed before such action are taken by companies in consumer goods industries.

The company not only aims to seek profit, but also to maximize the prosperity of its shareholders by maximizing the value of the company. Within the company, there are three people who have different interests, namely, company owners, shareholders and managers. When the company generates free cash flow, there will be differences in the interests of the parties who make the work contract and create a conflict that will cause the company to pay costs, which is called agency cost. The result of this difference in interest can also affect the company's financial performance, because the company's finances are not going well. The purpose of this study was to determine the effect of free cash flow (FCF) on agency cost and financial performance in financial sector companies listed on the IDX in 2015-2016. The type of research used in the research is Explanatory Research, with a population of 83 companies listed on the Indonesian stock exchange in the financial sector in 2015-2016. The sampling technique used the purposive sampling method as many as 61 companies listed on the Stock Exchange in the financial sector 2015-2016. The analytical tool used in this study is a simple regression test. Based on the results of the analysis, it is found that free cash flow (FCF) has a positive and significant effect on agency cost in financial sector companies listed on the IDX 2015-2016 of 33.7% and free cash flow (FCF) has a positive and significant effect on performance. finance by 34.0%.

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.

Historically, it was common for companies to issue assessable stock. With assessable stock, a company’s board of directors could request additional payments beyond the initial stock price. Typicall...

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.

This research investigates the consequences of the increase in corporate use of short-term debt in China over the past decades. Using a sample of Chinese firms from 2007 to 2018, we empirically explore the effect of corporate use of short-term debt for long-term investment (SFLI) on audit pricing. We first examine the relationship between SFLI and audit pricing for different groups of firms. Then, we investigate the role of the increase in short-term debt in alleviating principal-agent conflicts and reducing agency costs. We have four primary empirical findings. First, auditors tend to charge SFLI clients higher fees. Second, the negative relationship between SFLI and audit fee is found in private firms, firms audited by Chinese domestic auditors, and firms with higher information asymmetry. Third, the time auditors spent on SFLI clients is significantly more than that spent on non-SFLI clients, suggesting that the decrease in audit fee is not due to the decrease in cost. Fourth, SFLI significantly reduces the agency costs of the firm, which auditors regard as a low risk signal and grant an audit fee discount. Our findings suggest that the decrease in debt maturity, not only influences managerial behaviors, but also influences auditors’ risk assessment and pricing decisions.

The purpose of this research is to examine the effect of capytal structure and managerial ownership on firm performance by agency cost as an the intervening variable. The sample used is a manufacturing company sector 4 (varoius industries) and sector 5 (goods industries consumsy) listed in Indonesia Stock Exchange in 2015-2019. Were selected in the sampling method of sample use purposive.The data use dissecondary data and the analysis methodusedis multiple regression path analyze method. The results showed that the independent variables capital structure has a negative effect on the agency cost, and managerial ownership has a negative effect on the agency cost. The independent variables capital structure has a negative effect on the firm performance and capital structure has a negative indirect effect on the firm performance by agency cost. The independent variables managerial ownership has no positive effect on the firm performance and managerial ownership has a negative indirect effect on the firm performance by agency cost. Agency cost has no negative effect on the firm performance.

PurposeThe aim of this study is to investigate the effect of foreign institutional investors (FII) on the contribution of cash and dividend to firm's value in the context of Japan.Design/methodology/approachThis study used a sample of 1,929 nonfinancial firms listed in Tokyo Stock Exchange in the period from 2002 to 2016. For data analysis, pooled OLS regression with firm and year fixed effect is applied. Further, the p-value of difference is used to test the null hypothesis of equal coefficients.FindingsThe findings depict that cash holdings contribute more to firm's value when ownership by FII is high. Contrarily, dividends contribute more to firm's value when ownership by FII is low. The results remain consistent after using excess cash holdings instead of cash holdings and after re-estimating the main regression model in the presence of top 30% and bottom 30% ownership level.Research limitations/implicationsThis study is limited to Japanese nonfinancial sector. The results implied that firms where the probability of managerial agency cost and expropriation of cash is high, the presence of FII mitigates the agency cost and positively influences the contribution of cash to firm's value. Overall, this research highlighted the disciplinary and monitoring role of FII in Japan.Originality/valueThis study provides new insights on the monitoring and governance role of foreign institutions, showing that FII promote better cash management and utilization, which significantly affects the contribution of cash holdings to firm's value.

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.

This paper examines how the firm’s choice of investment horizon interacts with rent-seeking by privately informed, multitasking managers and the labor market. Two main results surface. First, managers prefer longer-horizon projects that permit them to extract higher rents from firms, so short-termism involves lower agency costs and is value maximizing for some firms. Second, when firms compete for managers, firms practicing short-termism attract better managerial talent when talent is unobservable, but larger firms that invest in long-horizon projects hire more talented managers when talent is revealed. (JEL D82, D86, G31, G32, J41) Received July 25, 2019; editorial decision July 7, 2020 by Editor Uday Rajan.

This study tests the catering theory and explores the main determinants of dividend payments across a sample of eleven emerging countries. There is evidence of catering to investor sentiment for dividends in Middle Eastern and North African countries. Dividend payers are mature, profitable, large firms with lower growth opportunities, and high dividend premiums, which supports the catering, lifecycle, and agency theories. Catering behavior persists even after controlling for the effect of Arab Spring. Difference-in-difference analysis shows that countries highly affected by the political transition period are less likely to pay dividends in the post-Arab Spring period than less affected countries. Catering decreases significantly in the post-Arab Spring period as compared with during- and pre-Arab Spring periods, suggesting that investors prefer that managers retain earnings to reinvest and grow during unstable economic conditions. Furthermore, catering persists in countries with high corruption levels and poor legal quality to reduce agency cost, and substitute for weak legal systems with poor enforcement of laws.

Purpose This paper aims to investigate the effect that ownership structure (public vs private) has on the demand for high-quality auditors, specifically in the US banking industry. Design/methodology/approach The authors predict that public banks are more likely to hire a high-quality auditor than private banks and pay a higher audit fee premium for that high-quality auditor (due to higher agency costs, more demand for financial information and higher litigation risk). The authors analyze 2008–2014 banking data from the Federal Reserve using probit and OLS regression analysis to examine if there is a higher probability that public banks choose higher quality auditors and pay higher audit fees when they do so. Findings The results show that private banks are less likely to hire Big 4 auditors and industry-expert auditors than public banks. The authors also find that both private and public banks pay higher audit fees for Big 4 and industry-expert auditors, and that public banks pay a higher premium for Big 4 auditors and industry experts than private banks. Research limitations/implications The findings may not be fully generalizable to other types of firms, as banking is a heavily regulated and complex industry. However, inferences from this study may be generalizable to other similar industries such as insurance or health care. Practical implications The results of this paper imply that public and private banks have differing priorities when hiring their financial statement auditor. This may be of interest to investors and auditing regulators. Social implications The findings of this paper underscore the value of hiring an industry-expert auditor in an industry that is highly complex and regulated. This may be of interest to managers and policymakers. Originality/value Due to data restrictions, the emphasis of prior literature on the banking industry has been on public banks. This study is the first to analyze the differences between public and private banks’ demand for audit services.