Managerial Ownership and Agency Cost: Evidence from Bangladesh

This study examines the influence of managerial ownership on firm agency costs among listed firms in Bangladesh. This is an institutional setting that features a mixture of agency costs. This institutional setting has a concentration of ownership by managers, but the firms are not solely owned by managers. The extant literature suggests that the sacrifice of wealth by the principal and potential costs associated with monitoring the agents is known as the agency cost. This study uses three measures of agency cost: the ‘expense ratio’, the ‘Q-free cash flow interaction’, and the ‘asset utilisation ratio’. The finding of the study is that managerial ownership reduces the firm agency cost only under the ‘asset utilisation ratio’ measure of agency cost; this is robust with regard to a number of robustness tests. Furthermore, the non-linearity tests suggest that the convergence of interest is evident with very high and low levels of managerial ownership. The entrenchment effect by the owners is evident at moderate levels of managerial ownership. Although there has been great scepticism among management researchers on the validity of agency theory, overall, the findings of this study do not reject the validity of agency theory. Given that the entrenchment by managers is evident at certain levels of ownership and that the agency problem may still exist between insiders and outsiders, legislative guidelines for controlling share ownership may be required.     

Capital structure and cost efficiency in the Taiwanese banking industry

By utilizing a sample of 44 Taiwanese banks, this study analyses whether banks can mitigate agency costs, to increase firm performance through optimization of capital structure. The stochastic frontier approach is adopted to determine cost efficiency as the firm performance indicator, an approach that is capable of controlling outside environmental factors. Furthermore, this study uses two-stage least squares to estimate two simultaneous equations that are then used to examine the relationship between capital structure and firm performance. This study includes indicators of ownership structure. The main results are: first, optimal capital structure is selected by the manager to combat the agency problem and thus improve performance, yielding results consistent with agency theory; and second, reducing managerial share ownership will decrease agency cost and increase firm performance, a finding that is consistent with the Entrenchment Hypothesis.     

Equity Agency Costs Amongst Manufacturing SMEs

The principal objectives in this paper are to assess and to build upon the recently published research of Ang et al. (2000) making a pioneering attempt to estimate equity agency costs in a large cross-sectional sample of smaller, non-publicly traded companies in the United States. The present research employs panel data for 871 manufacturing SMEs legally organised as proprietary companies, taken from the Australian federal government's Business Longitudinal Survey conducted over four financial years from 1994–1995 to 1997–1998. The two proxies for equity agency costs that are trialed – operating expense ratio and asset turnover ratio – both appear lower in more complex agency relationships. It is also found that greater enterprise growth is significantly more evident amongst SMEs with more complex agency relationships. Thus, it is possible that observed differences in values for the two equity agency cost proxies are not the direct consequence of differences in management and ownership structures; but, rather, of differences in the experience of enterprise growth, possibly enabled to some degree by the management and ownership structures adopted. This raises the question of whether, in fact, operating expense ratio and asset turnover ratio can be reliably used as proxies for equity-related agency costs in SME research.     

Do Banks Price Owner–Manager Agency Costs? An Examination of Small Business Borrowing

Ang, Cole, and Lin (2000) provide evidence that supports the theoretical work of Jensen and Meckling (1976) on agency costs. As a further examination, I conduct a test to determine the economic significance of owner–manager agency conflicts. Using the same data source and empirical framework as Ang, Cole, and Lin (2000), I test to determine if banks charge a premium when extending loans to firms with various ownership structures. In empirical tests, I find that banks do not require an owner–manager agency premium either through increased interest rates or through the requirement of collateral. Instead, I find that the interest rate is significantly affected by the length of the longest banking relationship, the number of banking relationships, firm age, and firm size. Additionally, the requirement of collateral is significantly affected by the number of banking relationships, the debt position of the firm, and firm size.     

Capital Structure,Management Ownership and Large External Shareholders: A UK Analysis

This paper examines empirically the effects of management ownership and ownership by large external shareholders on the capital structure of the firm from an agency theory perspective. The paper extends the US literature on the topic by examining the effect of interactions between management ownership and ownership by large external shareholders on the capital structure of UK firms. For a sample of UK firms, the paper provides empirical evidence that suggests the debt ratio is positively related to management ownership and negatively related to ownership by large external shareholders. Furthermore, the presence of a large external shareholder acts to negate the positive relationship between debt ratios and management ownership; in the presence of a large external shareholder, no significant relationship between debt ratios and management ownership exists. These findings are consistent with the hypothesis that the presence of large external shareholders affects the agency costs of debt and equity.     

Ownership structure and earnings management in emerging markets—An institutionalized agency perspective

Previous earnings management research has largely focused on firm-level governance mechanisms in single countries or on macro-level variables in multiple countries. Building on this research, we incorporate firm ownership predictors along with national institutional dimensions to explore why firm decision makers in emerging markets vary in their earnings management behavior. Our theoretical framework integrates agency and institutional theories proposing that firm-level ownership mechanisms do not function in isolation, but are reinforced or attenuated by elements of the institutional governance environment. The multilevel empirical analysis of 1200 firms in 24 emerging markets indicates that controlling ownership is positively related to earnings management. We find that the level of minority shareholder protection in a country weakens this positive relationship. We also find that regulatory quality strengthens the negative relationship between institutional ownership and earnings management activity. It is hoped that awareness of how firm ownership structures interact with national-level institutions in affecting firm-level behavior will help managers and investors develop skills and practices to better cope with business norms in emerging economies.     

The Effectiveness of Capital Regulation on Bank Behavior in China

This paper examines the impact that ownership and governance structures have on how Chinese banks react to regulatory pressure. We find that the current regulatory regime induces banks to increase their capital, but its effectiveness in doing so varies based on whether the bank is listed or not, and also who is the majority shareholder. We also find that the degree of central government ownership and the political ties the chief executive officer of the bank has play an important role in the risk‐taking behavior of banks. Overall, our results have a number of policy implications supporting the need to further reduce state ownership of banks in China to mitigate the prevailing moral hazard and dual‐agency problems that arise from the government being both the regulator and the majority shareholder.     

What Drives Financial Innovations in Kenya’s Commercial Banks? An Empirical Study on Firm and Macro-Level Drivers of Branchless Banking

ABSTRACT

This paper examines the firm- and macro-level drivers of financial innovations in Kenya’s commercial banks. We focus on branchless banking innovations, namely: mobile banking, agency banking, internet banking and automated teller machines. These financial innovations represent a departure from traditional branch based banking. We conduct an empirical analysis of the four financial innovations using Koyck distributed lag models, estimated using dynamic panel estimation with System Generalized Method of Moments. We use 10-year panel data from 42 out of 43 commercial banks in Kenya covering the years 2004–2013. We provide empirical evidence that at the firm level, branchless banking is driven by firm size, transaction cost, agency costs, technological developments at the firm level and firm constraints. In addition, at the macro level, regulation, technological developments at the macro level, incompleteness in financial markets and globalization are important drivers of branchless banking.     

Cost efficiency among credit card banks

Credit card banks produce a single, relatively homogeneous output, permitting exceptionally clean empirical tests of cost efficiency. The high net interest margins and fees on credit card loans also suggests a large potential for managerial slack or expense preference behavior, possibly fostering a wider range of cost efficiency than observed for general-purpose banks. This paper presents estimates of cost efficiency for a sample of monoline credit card banks over the period 1984–1993; the findings are similar to those previously reported for general-purpose banks. We also explore empirical correlates of the estimated cost efficiency.     

Unfolding China’s state-owned corporate empires and mitigating agency hazards: Effects of foreign investments and innovativeness

Integrating agency and institutional perspectives, we describe how China’s socio-political institutions create state-owned corporate empires with unique agency conflicts. We develop a framework demonstrating how economically unjustified firm expansion, i.e. empire building, mediates the relationship between state ownership and performance. We uncover the instrument in empire building and appropriate corporate governance and strategic management remedies. An empirical study on 29,638 Chinese firms evidences that (1) increased state ownership drives higher management expenses and lower firm profitability though empire building; (2) long-term debt is used to finance empire building; and (3) foreign capital investments and innovativeness can mitigate these agency conflicts.     

A Note on Agency Conflicts and the Small Firm Investment Decision*

This paper explains how agency conflicts—and potential agency conflicts—can influence the investment decisions of small firms, and provides evidence of these effects using data from a recent survey of small firm investment practices. The survey asks business owners to identify their most important investment concern—overinvestment or underinvestment. We find that underinvestment concerns are more prevalent in growing firms, and those with concentrated ownership and control structures. Overinvestment concerns increase as firms adopt less‐concentrated ownership and control structures. These results suggest that the management challenges facing small firms shift as the degree of separation between ownership and control becomes greater.     

Small Business Borrowing and the Owner–Manager Agency Costs: Evidence on Finnish Data

This study investigates the impact that managerial ownership has on loan availability and credit terms. We find that managerial ownership is common in a sample of small and medium‐sized Finnish firms. Our results suggest that an increase in managerial ownership decreases loan availability. The results on loan interest rates suggest that though an increase in managerial ownership initially increases interest rates, the effect is reversed at higher levels of ownership. Collateral requirements increase monotonically with managerial ownership. Overall, the results suggest that banks view that there are agency costs involved with managerial ownership even in small and medium‐sized firms and that this is taken into account when lending to these firms.     

Women in top management and agency costs

This study investigates gender diversity among the top managers of Fortune 500 firms and its effect on agency costs. The study finds that firms with a greater percentage of female officers present lower agency costs but that the negative relation is not robust when considering the endogeneity of diversity. The study also finds that external governance influences the relationship. Although increasing diversity does not reduce agency costs for all firms, the evidence shows that diversity is significantly negatively related to agency costs in firms in less competitive markets. The results suggest that increasing diversity in management can have beneficial effects for firms where strong external governance is absent.     

Owner as Manager,Extended Horizons and the Family Firm

Previous work on firm ownership structure suggests that organizations in which ownership and control are combined may be undervalued relative to the market investment rule because decision makers have an incentive to forgo investment projects that managers in firms with specialized ownership find profitable. However, the specialization of ownership and decision-making functions may result in substantial agency costs. This paper shows that these tradeoffs may not exist in family firms. The extended horizons characteristic of family businesses may provide the necessary incentives for decision makers to invest according to the market rule while limiting agency costs that arise when ownership and control are separated. Family ties, loyalty, insurance, and stability are expected to be effective in lengthening the horizons of managers and in providing the incentives for family managers to make efficient investments in the family business.     

Managerial Stock Ownership and Debt Diversification

In this study, we examine the impact of managerial behavior on the debt diversification decisions of firms using the agency cost of debt framework. We hypothesize that managers with higher equity ownership should favor debt diversification to avoid efficient monitoring by debt holders and thus, be able to engage in risk‐shifting behavior. Our empirical results provide strong evidence for a positive association between managerial ownership and debt diversification. This relationship is observed to be stronger for smaller firms, which are traditionally more susceptible to the moral hazard problem. Our results remain robust for an alternate measure of debt diversification.     

Effects of personal taxes and equity issuing costs on the firm's investment decision

The existence of preferential taxes on capital gains relative to ordinary income is widely understood to create a systematic preference for internal rather than external equity financing. This preference is magnified by the existence of issuing costs on new equity. This paper develops a procedure to account for these market imperfections in terms of an adjusted net present value that directly adjusts a project's net present value calculated without regard to the imperfections. Once the correct adjustment procedure is developed, the practical implications of personal taxes and issuing costs on the firm's investment behavior clearly emerges. These market imperfections have created a discontinuous function for the firm in obtaining equity capital. Many rational wealth-maximizing firms are forced to make investment decisions in a situation similar to capital rationing as the separation theorem between investing and financing does not generally hold. This explanation of a potentially long-run need for capital rationing is consistent with otherwise perfect capital markets.     

Investor protection and dividend policy: The case of Islamic and conventional banks

This study examines the dividend policy behavior of Islamic and conventional banks operating in Arab markets. These banks operate in an environment of Sharia law and low levels of investor protection. Our results support the substitution agency model of dividends for Islamic banks, and Islamic banks use the dividend policy as a substitute mechanism for alleviating relatively more significant agency problems and higher risks of expropriation by insiders. In these markets, conventional banks operate in a more competitive environment and experience relatively less significant agency problems. In contrast to Islamic banks, conventional banks follow the outcome agency model of dividends.     

Testing for Expense Preference Behaviour in UK Building Societies: the Implications for Measures of Scale and Scope Economies

It is well established that utility maximising managers who are not owners of the firm may engage in expense preference behaviour. This article provides the first test for expense preference behaviour in UK building societies. A translog cost function is specified and a direct test for expense preference is conducted which avoids the restrictive assumptions of the intercept test which has been used to test for expense preference behaviour in a number of previous articles. The specification of a translog cost function also permits the estimation of scale and scope economies in UK building societies and this paper compares the estimates obtained when expense preference behaviour is present with previous estimates obtained under the assumption of cost minimising behaviour.     

CEO cash compensation determinants: an empirical examination of US airlines

This study empirically investigated the determinants of cash compensation for chief executive officers (CEOs) for US airlines in the post-9.11 period. After an analysis of 53 firm-year observations from 2002 to 2004, we found that the airline CEO cash compensation was positively correlated with the size and revenue efficiency of an airline firm whereas growth, debt use, profitability, and stock performance were irrelevant to the compensation. Larger airlines with better revenue-generating ability tended to offer high cash compensation to their CEOs. Our findings suggest that the pay-for-performance principle has yet to be fully implemented in the airlines industry. To minimize agency problems and enhance the firm value of US airlines, CEO compensation should be based not only on revenue efficiency but also on profitability and stock performance.     

Audit quality in common-law and code-law emerging markets: Evidence on earnings conservatism, agency costs and cost of equity

This study focuses on firms that are audited by a big auditor and examines the differentiation in the earnings management potential and the level of conservatism. It also investigates whether being audited by a big auditor would lead to lower agency costs and lower cost of equity. The study focuses on emerging common-law South Africa and code-law Brazil, and seeks to identify whether there are material differences given their dissimilar institutional characteristics. The study reports that even though firms may be audited by high quality auditors, their institutional differences influence significantly firms' earnings conservatism, agency costs and cost of equity. Client firms of big auditors in both common-law South Africa and code-law Brazil exhibit lower discretionary accruals. The study has found evidence of more conservative earnings for South Africa but insufficient levels for Brazil. For common-law South Africa, the presence of effective corporate governance mechanisms reduces agency costs. For code-law Brazil, the corporate governance mechanisms generally display an insignificant impact on reducing agency costs. For common-law South Africa, firm-level performance, growth and market determinants tend to lead to a lower cost of equity. For code-law Brazil, it is found that significant discretionary accruals, market beta and analyst forecast dispersion would result in higher uncertainty and would consequently raise the cost of equity.