Agency cost: Ownership structure and board composition — An empirical analysis

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Abstract

This study evaluates the ownership structure and board composition as an effective corporate governance mechanism to control agency costs. It uses pooled ordinary least squares (OLS) regression methodology on the annual panel data from 2010–2011 to 2021–2022 for 985 non-financial companies listed on the National Stock Exchange (NSE) of India, collected from the ProwessIQ database. Globally, agency costs have been measured mainly by two proxies: asset turnover ratio (ATR) and operating cost ratio (OPEX) whereas, this study has used two additional proxies: return on total assets (ROA) and interest coverage ratio (ICR). The study also takes into account the impact of all types of ownership holdings namely, promoters’, government, domestic and foreign institutional investors on the agency cost. It is observed that agency costs are significantly lower with both foreign and domestic institutional investor ownerships and it is inversely related to the number of independent directors, as well as the size of the board. The findings of this study, on the one hand, will be beneficial for the corporate houses in resolving the problem of principal-agent conflicts whereas, on the other side, it will help the policymakers in deciding the policies with respect to the composition of the board members and ownership structure.

Keywords: Agency Cost, Corporate Governance, Ownership Structure, Board Composition, Institutional Investors

Authors’ individual contribution: Conceptualization — K.B. and K.M.; Methodology — K.B. and K.M.; Software — K.M.; Validation — K.B. and K.M.; Formal Analysis — K.B. and K.M.; Investigation — K.B. and K.M.; Resources — K.M.; Data Curation — K.M.; Writing — Original Draft — K.B. and K.M.; Writing — Review & Editing — K.B. and K.M.; Visualization — K.B. and K.M.; Supervision — K.B.; Project Administration — K.B.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G30, G32, G34, O16

Received: 09.05.2023
Accepted: 28.07.2023
Published online: 01.08.2023

How to cite this paper: Bijoy, K., & Mangla, K. (2023). Agency cost: Ownership structure and board composition — An empirical analysis [Special issue]. Corporate Ownership & Control, 20(3), 351–358. https://doi.org/10.22495/cocv20i3siart10