Agency costs, corporate governance mechanisms and ownership structure in large UK publicly quoted companies: A panel data analysis

By Phillip J. McKnight, C. Weir. 2009

408 citations recorded by the source corpus.

This paper examines the impact of governance and ownership variables on agency costs for a panel of large UK quoted companies. We use three measures of agency costs: the ratio of sales-to-total assets, the interaction of free cash flows and growth prospects and the number of acquisitions. We employ a range of techniques to analyse the data: fixed-effects, instrumental variables, and Tobit regressions. We find that the changes in board structures that have occurred in the post-Cadbury period have not, generally, affected agency costs. This suggests a range of mechanisms is consistent with firm value maximisation. We also find that having a nomination committee increases agency costs, which indicates that there are costs associated with certain governance mechanisms. Increasing board ownership also helps to reduce agency costs. We also find that debt reduces agency costs. Our results raise questions about the usefulness of the information sent to shareholders when firms adopt a recommended governance framework.

Subfields: Accounting, Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/95b61e12ee5aa301807a461f161fb864013017b8

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Citations in the corpus

Revisiting Agency Theory: Evidence of Board Independence and Agency Cost from Bangladesh (2015, background): “The literature on agency cost argues that this measure is a reliable proxy for agency cost (Ang et al. 2000; Singh and Davidson 2003; McKnight and Weir 2009).”
Agency theory and managerial ownership: evidence from Malaysia (2011, neutral): “This notion is supported by McKnight and Weir (2009)”
Agency theory: Review of Theory and Evidence on Problems and Perspectives (2017, background): “Fauzi and Locke (2012), Sanjaya and Christianti (2012), and McKnight and Weir (2009) found that the presence of remuneration and nomination committees positively affect the agency cost.”
The effectiveness of internal corporate governance and audit quality: the role of ownership concentration – Malaysian evidence (2018, background): “However, the majority outsider shareholders have more incentives and ability to monitor the firm’s managers (McKnight and Weir, 2009; Mustapha and Ahmad, 2013; Singh and Davidson, 2003).”
Women on board, firm financial performance and agency costs (2012, positive): “Following the methods adopted by McKnight and Weir (2009) and McConnell and Servaes (1990), growth opportunities are measured by Tobin's Q dummy.”
Audit quality, debt financing, and earnings management: Evidence from Jordan (2017, background): “Even though earnings management studies use single-equation regression models, limited contemporary studies have recommended that a simultaneous equations technique could be further applicable, as models encompassing governance mechanisms bear endogeneity (McKnight & Weir, 2009).”
Agency costs, ownership structure and corporate governance compliance: A private contracting perspective (2010, background): “Doukas, McKnight and Pantzalis (2005), however, concluded that greater analyst following only reduced agency cost levels for small UK firms, and McKnight and Weir (2009) found minimal evidence that adoption of individual governance attributes consistent with the UK Combined Code recommendations…”