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The Impact of Managerial Entrenchment on Agency Costs: An Empirical Investigation Using UK Panel Data
Author(s) -
Florackis Chrisostomos,
Ozkan Aydin
Publication year - 2009
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/j.1468-036x.2007.00418.x
Subject(s) - agency cost , panel data , corporate governance , business , shareholder , incentive , proxy (statistics) , agency (philosophy) , dividend , principal–agent problem , asset (computer security) , asset turnover , accounting , sample (material) , index (typography) , endogeneity , leverage (statistics) , debt , finance , economics , microeconomics , econometrics , return on assets , profitability index , philosophy , chemistry , computer security , epistemology , chromatography , machine learning , world wide web , computer science
This paper empirically investigates the relationship between managerial entrenchment and agency costs for a large sample of UK firms over the period 1999–2005. To measure managerial entrenchment, we use detailed information on ownership and board structures and managerial compensation. We develop a managerial entrenchment index, which captures the extent to which managers have the ability and incentives to expropriate wealth from shareholders. Our findings, which are based on a dynamic panel data analysis, show that there is a strong negative relationship between managerial entrenchment and our inverse proxy for agency costs, namely asset turnover ratio. There is also evidence that short‐term debt and dividend payments work as effective corporate governance devices for UK firms. Finally, our findings reveal that agency costs are persistent over time. The results are robust to a number of alternative specifications, including varying measures of managerial entrenchment and agency costs.