Corporate Governance and Agency Cost (Model-based Approach) and the Mediating Role of Financial Policies

Document Type : Original Article

Authors

1 Ph.D. Candidate in Management, University of Isfahan, Isfahan, Iran.

2 Associate Prof., Department of Management, University of Isfahan. Isfahan, Iran

3 Associate Prof., Department of Economics, University of Isfahan, Isfahan, Iran.

Abstract

With the separation of ownership and management, the corporate governance system is a good tool in the hands of shareholders to reduce agency costs. Developing the literature in which agency cost is calculated by the absolute amount of cash flow or its interaction with growth opportunities, we measure it with a model-based approach. The second innovation is the adjustment of Tobin`s Q with inflation. Agency costs have been measured in 6 different proxies and their impactability from corporate governance has been analyzed with the mediating role of debt and dividend ratio. The data of companies listed on the Tehran Stock Exchange and Iran Fara Bourse except for financial intermediary companies in the period 2006 to 2020 have been analyzed using structural equations modeling and due to the non-normality of data, its variance-based approach, partial least squares (PLS) method is used. According to the results in all models based on one of the 6 proxies of agency cost, corporate governance has a positive effect on the dividend ratio and secondly, the debt ratio reduces agency costs. In the model-based approach, unlike other measures of agency costs, the path of corporate governance on dividend and dividend on agency costs was confirmed. Because of the impact of the debt ratio on model-based agency costs, shareholders must adjust the debt ratio leading to lower agency costs.

Keywords

References

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Financial Management Perspective
Volume 12, Issue 39
September 2022
Pages 33-61

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