Agency Costs, Mispricing, and Ownership Structure

CFA Digest ◽  
2013 ◽  
Vol 43 (2) ◽  
pp. 14-16
Author(s):  
Gregory G. Gocek
Keyword(s):  
Ownership Structure ◽  
Agency Costs

scholarly journals Agency Costs, Mispricing, and Ownership Structure

2010 ◽  
Author(s):  
Sergey Chernenko ◽  
C. Fritz Foley ◽  
Robin Greenwood
Keyword(s):  
Ownership Structure ◽  
Agency Costs

What values more? Agency costs or accrual quality

2017 ◽  
Vol 15 (1) ◽  
pp. 22-38 ◽  
Author(s):  
Jagjit S. Saini ◽  
Onur Arugaslan ◽  
James DeMello
Keyword(s):  
Ownership Structure ◽  
Agency Costs ◽  
Single Class ◽  
Accrual Quality ◽  
Content Type ◽  
Earnings Response Coefficients ◽  
Earnings Informativeness ◽  
Earnings Response ◽  
Dual Class

Purpose The purpose of this paper is to examine what is weighted more by the investors when valuing a dual-class firm’s stock – greater agency costs or better accrual quality of the dual-class firm in contrast to the single-class firm. Design/methodology/approach Using the financial data of firms issuing multiple classes of stock (hereafter dual-class firms) and firms issuing single class of stock (hereafter single-class firms), the authors measure the effect of firm’s ownership structure (dual class versus single class) on the earnings response coefficients (ERCs) of prior, current and future period earnings. Findings The authors find that investors care more about agency costs than the quality of accruals in evaluating the earnings of dual-class firms. Specifically, the authors find that current annual returns of the firm are negatively associated with dual-class ownership structure and that earnings informativeness and predictability are decreasing in dual-class ownership of the firm as reflected in decreasing ERCs. Originality/value This study adds to prior literature on dual-class ownership which reports greater agency costs and better accrual quality at dual-class firms in contrast to single-class firms. This study contributes to the literature on earnings informativeness and predictability by evaluating the effect of ownership structure on the ERCs of the firm. Investors should be careful when valuing a dual-class firm and should consider agency costs in addition to accrual quality of reported earnings at such firms.

Financial decisions and ownership structure as control mechanisms of agency problems: evidence from Italy

2018 ◽  
Vol 18 (3) ◽  
pp. 531-563 ◽  
Author(s):  
Fabrizio Rossi ◽  
Robert Boylan ◽  
Richard J. Cebula
Keyword(s):  
Ownership Structure ◽  
Agency Costs ◽  
Generalized Method Of Moments ◽  
Control Mechanisms ◽  
Minority Shareholders ◽  
Data Set ◽  
Business Decisions ◽  
Content Type ◽  
Financial Decisions ◽  
Practical Implications

Purpose The purpose of this study is to investigate the relationship between financial decisions and ownership structure by using the control contests on a sample of Italian listed companies. Design/methodology/approach The analysis adopts a balanced panel data set of 984 firm-year observations for the period of 2002-2013, with estimation using a generalized method of moments. Findings The results appear to confirm both the hypotheses of the alignment of interests and the entrenchment effect. The entrenchment and alignment effects are not found to be alternatives but rather are found to co-exist. The presence of a coalition of minority shareholders acts as a tool to control agency costs, particularly when the coalition is instrumental in the contestability of corporate control. Practical implications These findings suggest that minority shareholders may have a larger impact than previously identified by strategically aligning with other shareholders to form coalitions. This study provides several practical implications. First, dividend payout is not necessarily a good instrument to control and monitor agency costs. This is because the payout can be used to expropriate benefits from the minority shareholders. Second, high ownership concentration does not always reduce agency costs. Third, a non-collusive coalition can be more useful in the monitoring of agency costs than other tools, such as the debt level. Originality/value This study shows that there is considerable value to the firm when individual blockholders come together in a contestable environment and become instrumental in making business decisions. The results support the contention that contestability is an excellent deterrent to dampen the expropriation of benefits to minority shareholders. This study also provides evidence that cash holding can be a good substitute for dividends and debt in the effort to limit agency costs.

scholarly journals Agency costs, ownership structure and corporate governance mechanisms: A case study in New Zealand unlisted small companies

2011 ◽  
Vol 6 (3) ◽  
Author(s):  
Nirosha Hewa Wellalage ◽  
Stuart Locke
Keyword(s):  
Corporate Governance ◽  
Ownership Structure ◽  
Small Businesses ◽  
Diagnostic Tests ◽  
Agency Costs ◽  
Small Companies ◽  
Dynamic Panel ◽  
Corporate Governance Mechanisms ◽  
And Performance

This study investigates the linkage between agency costs, ownership structure and corporate governance in small business. Eleven years of data for 100 unlisted small businesses, are collected and 1099 observations are analysed using as dynamic panel GMM estimation. Various diagnostic tests are utilised to check for stationary and convergence of variables. The results indicate that ownership concentration has the most significant governance effect and also has the largest impact on corporate governance. Moreover, this study finds U-shape relationship between internal ownership and performance, which under that agency proxy. Agency costs vary with leverage the life of the business and with its size.

scholarly journals Ownership structure, agency costs, and discount rates

2007 ◽  
Vol 4 (3) ◽  
pp. 240-246 ◽  
Author(s):  
C. R. Krishna-Swamy ◽  
Mary M. Pashley
Keyword(s):  
Public Sector ◽  
Private Sector ◽  
Discount Rate ◽  
Ownership Structure ◽  
Agency Costs ◽  
Capital Asset Pricing ◽  
Discount Rates ◽  
Risk Free Rate ◽  
The Impact ◽  
Free Rate

In this paper, we explore the effects of agency costs on discount rates for public sector enterprises as well as private sector enterprises. Ownership structure has a direct impact on agency costs, and discount rates. We show this through an application of the Capital Asset Pricing Model (CAPM) framework. With the addition of agency costs, the discount rate, under uncertainty, for public sector enterprises (PSEs) as well as private sector enterprises (PVTSEs) becomes a variation of the CAPM risk adjusted discount rate plus a premium for agency costs. In some circumstances the impact of agency costs “cancels out,” otherwise it remains a relevant input to the calculation of required rates of return. For PSEs, under risk neutrality, the discount rate is the risk-free rate plus a premium for agency costs

scholarly journals Descriptive model of influence of ownership concentration on the corporate capital management

2021 ◽  
Vol 5 (1) ◽  
pp. 46-55
Author(s):  
Oleksandra Laktionova ◽  
Olha Rudenok
Keyword(s):  
Capital Structure ◽  
Ownership Structure ◽  
Agency Costs ◽  
Ownership Concentration ◽  
Principal Agent ◽  
Compensatory Mechanism ◽  
Company Performance ◽  
Agency Conflicts ◽  
Corporate Capital ◽  
The Capital Structure

Introduction. Significantly important factors that define the company's efficiency are the structure of proprietorship and capital structure. Therefore, the item of the relationship between these factors is reflected in the works of scientists. The necessary issue is the pick of correlation between own and borrowed funds since the optimum structure of capital leads to magnification of the market value based on company performance results. The relevance of deciding on the capital structure determines the feasibility of determining the effect of concentrated ownership on capital structure. In an unstable political, social, legal, and economic environment, ownership concentration turns into a compensatory mechanism that fills numerous institutional gaps. Concentrated possession enables it possible to influence the capital structure through agency costs. Aim and tasks. The main purpose of the article is to determine the link between concentration level of ownership and capital structure, between ownership structure and leverage. This paper substantiates the problem of “principal-agent” to identify problematic issues to further develop recommendations to strengthen appropriate market incentives. Results. The paper shows that the problem of the “principal-agent” exists independently of the rate of ownership concentration in the corporation. Agency costs are one of the determining factors in the composition of a corporation’s capital. This paper has clearly shown approaches to identifying the nature of the effect of ownership structure on the capital structure. It has been established how this influence is carried out, taking into account the mismatch of various groups of owners' interests and the effect of their “entrenching”, as well as the consequences of monitoring and expropriation with a highly concentrated structure of ownership. Conclusions. The choice of the ratio of own and borrowed funds depends on the actual ownership structure. Assumptions are made, the increase in the corporation's leverage owing to an increase in the blockholders shares. There is a reciprocal interconnection between leverage and agency costs. Because changing leverage is an instrument that helps to overcome agency conflicts and not just only proves is the result of their presence. The selected special characteristics gave grounds to conclude that the adjustment of the ratio of a company's debt to the value of its equity also depends on the goal of management solutions, as well as the current facility and prospects of the corporation.

Sign in / Sign up

Export Citation Format

Share Document