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Agency Problems (agency + problem)

Distribution by Scientific Domains

Business, Economics, Finance and Accounting	95%
Humanities and Social Sciences	4%

Distribution within Business, Economics, Finance and Accounting

General & Introductory Finance & Investments	33%
General & Introductory Economics	20%
Financial Accounting	6%
9 Other Subdomains	35%

Selected Abstracts

CONSUMERS AND AGENCY PROBLEMS

THE ECONOMIC JOURNAL, Issue 478 2002
Canice Prendergast
Consumers solve many agency problems, by pointing out when they believe that agents have made mistakes. I consider the role that consumers play in inducing efficient behaviour by agents. I distinguish cases where consumers have similar preferences to the principal, from those where they diverge. In the former case, allowing consumer feedback improves allocations, and increasing consumer information is unambiguously beneficial. Where consumers disagree with principals over desired outcomes, which characterises many public sector benefits, consumers' feedback about the performance of agents can reduce welfare. This may result in efficiently restricting the ability of consumers to complain about agent performance. [source]

Are Debt and Incentive Compensation Substitutes in Controlling the Free Cash Flow Agency Problem?

FINANCIAL MANAGEMENT, Issue 3 2009
Yilei Zhang
This paper investigates the governance implications of a firm's capital structure and managerial incentive compensation in controlling the free cash flow agency problem. The results suggest: debt and executive stock options act as substitutes in attenuating a firm's free cash flow problem; failure to incorporate the substitutability and endogeneity leads to underestimates of the magnitude and economic implication of the disciplinary role of both mechanisms; firm characteristics differ across the prevalence of debt usage versus option usage, suggesting the heterogeneity in the costs and benefits of the monitoring devices; and all the above effects are more pronounced in firms that tend to have more severe agency problem. [source]

Asset Write-Offs in the Absence of Agency Problems

JOURNAL OF BUSINESS FINANCE & ACCOUNTING, Issue 3-4 2008
Neil Garrod
Abstract:, Using a large sample of small private companies, we show incremental influence of economic incentives over prescriptions from accounting standards by financial statement preparers in a code-law setting with high alignment between financial and tax reporting and no agency problems. Contrary to predictions from standards, more profitable companies are more likely to write-off and the write-off magnitude is greater, reflecting tax minimisation. Larger companies are more likely to write-off, but the magnitude decreases with size, reflecting increasing political costs due to greater visibility to tax authorities. Previous write-off patterns and magnitudes are persistent, reflecting institutional learning linked to regulatory changes. [source]

Wealth Effects of International Investments and Agency Problems for Korean Multinational Firms

JOURNAL OF INTERNATIONAL FINANCIAL MANAGEMENT & ACCOUNTING, Issue 3 2003
Wi Saeng Kim
This paper recognizes the recent surge in cross-border investments by MNCs from newly industrialized countries and investigates the wealth effects of FDI announcements by Korean firms, which are the leading FDI providers in Asia. The empirical results indicate that for Korean MNCs: 1) cross-border investments increase shareholder wealth; and 2) they do not obtain the firm-specific technological advantages over international competitors. The paper also presents evidence that cross-border investments do not increase shareholder wealth for the 30 largest chaebol -affiliates, and that shareholder wealth losses are greater when corporate ownership is concentrated, as suggested by Shleifer and Vishny (1997) and La Porta et al. (1998, 2000). [source]

Agency Problems, the 17th Amendment, and Representation in the Senate

AMERICAN JOURNAL OF POLITICAL SCIENCE, Issue 2 2009
Sean Gailmard
A prominent change in American electoral institutions occurred when the 17th Amendment to the Constitution established direct election of U.S. Senators as of 1914. How did this change the political agency relationship between the mass electorate and U.S. Senators? We develop theoretical expectations about the representational effects of direct election by a relatively inexpert mass electorate and indirect election by a relatively expert political intermediary, based on principal-agent theory. The chief predictions are that the representative will be more responsive to the mass electorate under direct election, but will also have more discretion to pursue his or her own ends. We use the 17th Amendment as a quasi-experiment to test the predictions of the theory. Statistical models show strong support for both predictions. Moreover, the 17th Amendment is not associated with similar changes in the U.S. House of Representatives,as expected, since the amendment did not change House electoral institutions. [source]

Agency Problems and Dividend Policies around the World

THE JOURNAL OF FINANCE, Issue 1 2000
Rafael La Porta
This paper outlines and tests two agency models of dividends. According to the "outcome model," dividends are paid because minority shareholders pressure corporate insiders to disgorge cash. According to the "substitute model," insiders interested in issuing equity in the future pay dividends to establish a reputation for decent treatment of minority shareholders. The first model predicts that stronger minority shareholder rights should be associated with higher dividend payouts; the second model predicts the opposite. Tests on a cross section of 4,000 companies from 33 countries with different levels of minority shareholder rights support the outcome agency model of dividends. [source]

Agency problems and audit fees: further tests of the free cash flow hypothesis

ACCOUNTING & FINANCE, Issue 2 2010
Paul A. Griffin
G34; G35; M41; M42 Abstract This study finds that the agency problems of companies with high free cash flow (FCF) and low growth opportunities induce auditors of companies in the US to raise audit fees to compensate for the additional effort. We also find that high FCF companies with high growth prospects have higher audit fees. In both cases, higher debt levels moderate the increased fees, consistent with the role of debt as a monitoring mechanism. Other mechanisms to mitigate the agency costs of FCF such as dividend payout and share repurchase (not studied earlier) do not moderate the higher audit fees. [source]

Effects of Market Segmentation and Bank Concentration on Mutual Fund Expenses and Returns: Evidence from Finland

EUROPEAN FINANCIAL MANAGEMENT, Issue 3 2004
Timo P. Korkeamaki
G15; G18; G20 Abstract A tremendous amount of research examines US mutual funds, but fund markets also thrive in other countries. However, research about these fast growing markets is lacking. This study addresses Finnish funds. Fast growth of the Finnish fund industry, strong bank dominance in the industry and recent EU membership make it an interesting market to examine. The Finnish fund market is also of particular interest since it had the fastest growth among the EU countries during 1996,2000. We find evidence that bank-managed and older funds charge higher expenses but investors are not compensated for paying higher expenses with higher risk-adjusted returns, suggesting a potential agency problem. Overall, Finnish fund expenses have decreased over time, consistent with EU membership reducing market segmentation and generating competition. [source]

Are Debt and Incentive Compensation Substitutes in Controlling the Free Cash Flow Agency Problem?

Managerial Ownership and Accounting Conservatism in Japan: A Test of Management Entrenchment Effect

JOURNAL OF BUSINESS FINANCE & ACCOUNTING, Issue 7-8 2010
Akinobu Shuto
Abstract:, We examine the effect of managerial ownership on the demand for accounting conservatism in Japan. We find that within the low and high levels of managerial ownership, managerial ownership is significantly negatively related to the asymmetric timeliness of earnings, which is consistent with the implication of the incentive alignment effect. We also find a significant positive relationship between managerial ownership and the asymmetric timeliness of earnings for the intermediate levels of managerial ownership, as suggested by the management entrenchment effect. These evidences suggest the possibility that accounting conservatism contributes to addressing the agency problem between managers and shareholders. [source]

The Value-relevance of Earnings and Book Value, Ownership Structure, and Business Group Affiliation: Evidence From Korean Business Groups

JOURNAL OF BUSINESS FINANCE & ACCOUNTING, Issue 5-6 2007
Kee-Hong Bae
Abstract:, We investigate the quality of two primary accounting summary measures, i.e., earnings and book value, provided by firms belonging to Korean business groups (chaebols). We find that the value-relevance of earnings and book value is significantly smaller for firms affiliated with business groups. We also find that cross-equity ownership (a proxy for the agency problem between controlling and minority shareholders) negatively affects value-relevance, while foreign equity ownership (a proxy for the monitoring effect) positively affects value-relevance. This evidence is consistent with the view that the poor quality of earnings and book value provided by chaebol-affiliated firms is due to the inherently poor governance structure of chaebols. [source]

Institutional Investors and Executive Compensation

THE JOURNAL OF FINANCE, Issue 6 2003
Jay C. Hartzell
We find that institutional ownership concentration is positively related to the pay-for-performance sensitivity of executive compensation and negatively related to the level of compensation, even after controlling for firm size, industry, investment opportunities, and performance. These results suggest that the institutions serve a monitoring role in mitigating the agency problem between shareholders and managers. Additionally, we find that clientele effects exist among institutions for firms with certain compensation structures, suggesting that institutions also influence compensation structures through their preferences. [source]

Presidential Address: Do Financial Institutions Matter?

THE JOURNAL OF FINANCE, Issue 4 2001
Franklin Allen
In standard asset pricing theory, investors are assumed to invest directly in financial markets. The role of financial institutions is ignored. The focus in corporate finance is on agency problems. How do you ensure that managers act in shareholders' interests? There is an inconsistency in assuming that when you give your money to a financial institution there is no agency problem, but when you give it to a firm there is. It is argued that both areas need to take proper account of the role of financial institutions and markets. Appropriate concepts for analyzing particular situations should be used. [source]

Going Public without Governance: Managerial Reputation Effects

THE JOURNAL OF FINANCE, Issue 2 2000
Armando Gomes
This paper addresses the agency problem between controlling shareholders and minority shareholders. This problem is common among public firms in many countries where the legal system does not effectively protect minority shareholders against oppression by controlling shareholders. We show that even without any explicit corporate governance mechanisms protecting minority shareholders, controlling shareholders can implicitly commit not to expropriate them. Stock prices of such companies are significantly higher and firms are more likely go public because of this reputation effect. Moreover, insiders divest shares gradually over time, at a rate that is negatively related to the degree of moral hazard. [source]

Who Cares about Auditor Reputation?,

CONTEMPORARY ACCOUNTING RESEARCH, Issue 3 2005
JAN BARTON
Abstract I provide evidence on the demand for auditor reputation by examining the defections of Arthur Andersen LLP's clients following the accounting scandals and criminal conviction marring the auditor's reputation in 2002. About 95 percent of clients in my sample did not switch auditors until after Andersen was indicted for criminal misconduct regarding its failed audit of Enron Corp. I test whether the timing of client defections and the choice of a new auditor are consistent with managers' incentives to mitigate potentially costly information and agency problems. I find that clients defected sooner, mostly to another Big 5 auditor, if they were more visible in the capital markets; such clients attracted more analysts and press coverage, had larger institutional ownership and share turnover, and raised more cash in recent security issues. However, my proxies for agency conflicts , managerial ownership and financial leverage , are not associated with the timing of defections or the choice of new auditor. Overall, my study suggests that firms more visible in the capital markets tend to be more concerned about engaging highly reputable auditors, consistent with such firms trying to build and preserve their own reputations for credible financial reporting. [source]

The Agency Problems, Firm Performance and Monitoring Mechanisms: the evidence from collateralised shares in Taiwan

CORPORATE GOVERNANCE, Issue 3 2004
Lanfeng Kao
This paper indicates that there is an inverse relationship between collateralised shares and firm performance. We further show that this inverse relationship exists only in conglomerate firms. These findings imply that agency problems resulting from shares used as collateral by boards of directors are more serious in conglomerate firms than in non-conglomerate firms. Moreover, we provide evidence that monitoring by institutional investors, creditors and dividend policy can effectively reduce the agency problems of shares used as collateral and thus can improve firm performance. [source]

Altruism and Agency in the Family Firm: Exploring the Role of Family, Kinship, and Ethnicity

ENTREPRENEURSHIP THEORY AND PRACTICE, Issue 6 2006
Neri Karra
This article examines the relationship between altruism and agency costs in family business through an in-depth case study of a family firm. We found that altruism reduced agency costs in the early stages of the business, but that agency problems increased as the venture became larger and more established. Moreover, we suggest that altruistic behavior need not be confined to family and close kin, but may extend through networks of distant kin and ethnic ties. We thus present a more complex view of the agency relationship in family business than is often portrayed in the existing literature. [source]

Shareholder Wealth Effects of European Domestic and Cross-border Takeover Bids

EUROPEAN FINANCIAL MANAGEMENT, Issue 1 2004
Marc Goergen
G32; G34 Abstract This paper analyses the short-term wealth effects of large intra-European takeover bids. We find announcement effects of 9% for the target firms compared to a statistically significant announcement effect of only 0.7% for the bidders. The type of takeover bid has a large impact on the short-term wealth effects with hostile takeovers triggering substantially larger price reactions than friendly operations. When a UK firm is involved, the abnormal returns are higher than those of bids involving both a Continental European target and bidder. There is strong evidence that the means of payment in an offer has an impact on the share price. A high market-to-book ratio of the target leads to a higher bid premium, but triggers a negative price reaction for the bidding firm. We also investigate whether the predominant reason for takeovers is synergies, agency problems or managerial hubris. Our results suggest that synergies are the prime motivation for bids and that targets and bidders share the wealth gains. [source]

The Two Faces of Analyst Coverage

FINANCIAL MANAGEMENT, Issue 2 2005
John A. Doukas
We find that positive excess (strong) analyst coverage is associated with overvaluation and low future returns. This finding is consistent with the view that excessive analyst coverage, driven by investment banking incentives and analyst self-interests, raises investor optimism causing share prices to trade above fundamental value. However, weak analyst coverage causes stocks to trade below fundamental values. This finding indicates that investors tend to believe that these firms are more likely to be plagued by information asymmetries and agency problems. The results remain robust after controlling for the possible endogenous nature of analyst coverage and analysts' self-selection bias. [source]

50+ Years of Diversification Announcements

FINANCIAL REVIEW, Issue 2 2010
Mehmet E. Akbulut
G34 Abstract This paper studies announcement returns from 4,764 mergers over 57 years to shed light on several controversies concerning corporate diversification. One prominent view is that diversification destroys value because of agency problems or internal investment distortions, but we find that combined (acquirer plus target) announcement returns are significantly positive for diversifying mergers throughout the period, and no lower than the returns for related mergers. The returns from diversifying acquisitions fell after 1980, and investors rewarded mergers involving financially constrained firms before but not after 1980, consistent with the idea that the value of internal capital markets declined over time. [source]

Corporate Governance and Asset Sales: The Effect of Internal and External Control Mechanisms

FINANCIAL REVIEW, Issue 3 2006
Robert C. Hanson
G32; G34 Abstract We investigate firms that sell assets to determine whether corporate governance mechanisms are effective at controlling agency problems. Our evidence shows that these firms have lower managerial ownership and are more likely to make unrelated acquisitions, suggesting weak internal controls. Analysis of insider trading activity shows that, on average, net buying increases before the asset sale and shareholders benefit more when this occurs. Results suggest that how managers reach a given level of ownership provides more information about incentive alignment than just the level of ownership. Our results also highlight the dynamic nature of corporate restructuring as firms acquire and then sell assets. [source]

The Effect of Managerial Ownership on the Short- and Long-run Response to Cash Distributions

FINANCIAL REVIEW, Issue 2 2003
Keith M. Howe
G32/G35 Abstract We examine both the short-run and long-run responses to the following corporate cash flow transactions: dividend increases and decreases, dividend initiations, and tender offer repurchases. Our focus is the short-run and long-run effects of managerial ownership. We hypothesize that ownership plays an important role in explaining the announcement effects for these events, owing to signaling effects and the reduction of agency problems. Our short-run results accord well with the earlier work on announcement effects for these events and show that firms with high insider ownership exhibit higher excess returns. Our long-term results indicate a drift over a three-year period following the announcement, with the excess returns for the high insider-ownership group becoming more pronounced. [source]

A Perspective on UK Productivity Performance

FISCAL STUDIES, Issue 3 2001
Nicholas Crafts
Abstract The paper reviews recent UK productivity performance using insights from new growth economics and its embodiment in growth accounting techniques. The sources of the UK labour productivity gap are found to differ across countries; broad capital per worker plays a larger part with regard to France and Germany while innovation matters more compared with the USA. The role of incentive structures is examined and the importance of competition as an antidote to agency problems in UK firms is highlighted. Current UK policy is reviewed and the need to address government as well as market failures is stressed. [source]

Agency problems and audit fees: further tests of the free cash flow hypothesis

Investor Protections and Concentrated Ownership: Assessing Corporate Control Mechanisms in the Netherlands

GERMAN ECONOMIC REVIEW, Issue 2 2004
Robert Chirinko
Corporate governance; legal approach; the Netherlands Abstract. The Berle,Means problem , information and incentive asymmetries disrupting relations between knowledgeable managers and remote investors , has remained a durable issue engaging researchers since the 1930s. However, the Berle,Means paradigm , widely dispersed, helpless investors facing strong, entrenched managers , is under stress in the wake of the cross-country evidence presented by La Porta, Lopez-de-Silanes, Shleifer and Vishny, and their legal approach to corporate control. This paper continues to investigate the roles of investor protections and concentrated ownership by examining firm behaviour in the Netherlands. Our within-country analysis generates two key results. First, the role of investor protections emphasized in the legal approach is not sustained. Rather, firm performance is enhanced when the firm is freed of equity market constraints. Second, ownership concentration does not have a discernible impact on firm performance, which may reflect large shareholders' dual role in lowering the costs of managerial agency problems but raising the agency costs of expropriation. [source]

Do External Auditors Perform a Corporate Governance Role in Emerging Markets?

JOURNAL OF ACCOUNTING RESEARCH, Issue 1 2005
Evidence from East Asia
ABSTRACT In emerging markets, the agency conflicts between controlling owners and the minority shareholders are difficult to mitigate through conventional corporate control mechanisms such as boards of directors and takeovers. We examine whether external independent auditors are employed as monitors or as bonding mechanisms, or both, to alleviate the agency problems. Using a broad sample from eight East Asian economies, we document that firms with agency problems embedded in the ownership structures are more likely to employ Big 5 auditors. This relation is evident among firms that raise equity capital frequently. Consistently, firms hiring Big 5 auditors receive smaller share price discounts associated with the agency conflicts. Also, we find that Big 5 auditors take into consideration their clients' agency problems when making audit fee and audit report decisions. Taken together, these results suggest that Big 5 auditors do have a corporate governance role in emerging markets. [source]

The Squam Lake Report: Fixing the Financial System,

JOURNAL OF APPLIED CORPORATE FINANCE, Issue 3 2010
Kenneth French
In these excerpts from The Squam Lake Report, fifteen distinguished economists analyze where the global financial system failed, and how such failures might be prevented (or at least their damage better contained) in the future. Although there were many contributing factors to the crisis,including "agency" problems throughout the financial system and a bankruptcy code poorly suited for reorganizing financial firms,at the core of the problem is a potential conflict between the risk-taking proclivity of financial institutions and the interests of the economy at large that must be managed at least in part through more effective regulation. The Squam Lake Report provides a nonpartisan plan to transform the regulation of financial markets in ways designed to limit systemic risk while preserving,to the extent possible and prudent,the economies of scale and scope that justify the existence of today's large financial institutions. To reduce the risks that large banks will fail, the authors call for higher capital requirements based on more effective assessments of the risks of bank assets and liabilities, as well as a new systemic regulator that should be part of the central bank. To reduce the costs of failure when it occurs, the authors propose that banks be required to create "living wills" laying out their plan to sell assets or shut down operations in the event of financial trouble. As part of that plan, regulators are urged to "aggressively encourage" banks to issue "contingent" debt capital securities that convert into equity. [source]

Voluntary Appointment of Independent Directors in Taiwan: Motives and Consequences

JOURNAL OF BUSINESS FINANCE & ACCOUNTING, Issue 9-10 2008
Chaur-Shiuh Young
Abstract:, This study explores factors that motivate firms to increase board independence in the absence of legal requirements to do so. In addition, we examine the impact of voluntary enhancement of board independence on firm performance. Using a sample of listed companies in Taiwan, we show that voluntary appointment of independent directors is associated with both economic factors and managerial power. Specifically, we find that board independence increases with the weaknesses of alternative corporate governance mechanisms and the severity of agency problems. However, board independence decreases with managerial ownership and family control. In addition, by employing a simultaneous equations model with selectivity, we provide evidence supporting the positive performance impact of voluntary appointment of independent directors in Taiwan. [source]

Asset Write-Offs in the Absence of Agency Problems

Large Shareholder Entrenchment and Performance: Empirical Evidence from Canada

JOURNAL OF BUSINESS FINANCE & ACCOUNTING, Issue 1-2 2008
Yves Bozec
Abstract:, Recent empirical evidence indicates that the largest publicly traded companies throughout the world have concentrated ownership. This is the case in Canada where voting rights are often concentrated in the hands of large shareholders, mostly wealthy families. Such concentrated ownership structures can generate specific agency problems, such as large shareholders expropriating wealth from minority shareholders. These costs are aggravated when large shareholders don't bear the full costs of their decisions because of the presence of mechanisms (dual class voting shares, pyramids) which lead to voting rights being greater than the cash flow rights (separation). We assess the impact of separation on various performance metrics while controlling for situations when the large shareholder has (1) the opportunity to expropriate (high free cash flows in the firm) and (2) the incentive to expropriate (low cash flow rights). We also control for when the large shareholder has the power to expropriate (high voting rights, outright control and insider management) and for the presence of family ownership. The results support our hypotheses and indicate that firm performance is lower when large shareholders have both the incentives and the opportunity to expropriate minority shareholders. [source]