Agency theory and managerial ownership: evidence from Malaysia

Abstract

Purpose: The purpose of this paper is to investigate the effect of managerial ownership in relation to agency theory in the Malaysian business environment. In addition to examining the total managerial shareholdings, this study also investigates the association between direct and indirect managerial shareholdings with agency costs. Design/methodology/approach: The data for the study is obtained from two sources, namely primary (questionnaire) and secondary (annual reports) data. The sample companies are 235 companies listed on Bursa Malaysia for the financial year ended 2006. Multiple regression analysis is used to estimate the relationship between the variables. Findings: The results of the study indicate that managerial ownership in various segments has an inverse relationship with total monitoring costs as predicted in agency theory. This finding is consistent with earlier studies in western countries and supports the convergence of interest hypothesis. Originality/value: This study gives a unique contribution to corporate governance studies relating to the effect of ownership structure in relation to agency theory in Malaysian companies, one of the countries in Asia. Previous studies claimed that it is unknown whether the agency theory findings in western countries have equal impact in Asian organizations. Previous literature also indicates that there is a possibility that given the cultural differences, the typical nature of agents in agency theory may not be the case with regard to non-western countries. Thus, this study provides evidence that support prior research findings in western countries relating to the effect of managerial ownership on the agency relationship which is reflected in its agency costs.

Managerial Ownership, Horizontal Agency Costs and Monitoring Mechanisms

“…The results show http://dx.doi.org/10.15405/epsbs.2016.08.37 eISSN: 2357-1330 The result supports hypothesis 1 that managerial ownership (MO) negatively influences the demand for monitoring mechanisms, directorship, internal and external auditing. This conforms to the earlier studies in the developed and transiting countries (Mustapha & Che-Ahmad, 2011;Eng & Mak, 2003).…”

“…The Nigerian Securities and Exchange Commission (SEC), conducts oversight functions over all There are many definitions for monitoring mechanisms in the existing literature (Huson et al, 2001;Kao et al, 2004;Slyke, 2006;Mustapha & Che-Ahmad, 2011). However, it is clear from all the definitions that shareholders rely on the monitoring mechanisms to resolve agency problems in companies with their investments.…”

“…The study of Mustapha and Che-Ahmad (2011) investigates agency theory and managerial ownership (MO) using data from 235 Malaysian listed companies. The study finds that MO inversely relates to total monitoring costs.…”

“…Failure to align the interests of the management, controlling shareholders, a board of directors and other investors results in high agency costs. Such failures account for the incidence of the financial crisis and frequent business failure, which suggest the need for investors' protection (Mustapha & Che-Ahmad, 2011). Therefore, monitoring mechanisms are meant to constrain ineffectiveness that can result from the agency problems (He & Ho, 2010).…”

The Effect of 2011 Revised Code of Corporate Governance on Pricing Behaviour of Nigerian Auditors

“…Similarly, the study took into account the natural log transformation of ratio of inventory to total assets (LOGRITA) and the number of subsidiaries (SUB1) plus one to control for audit complexity (Ahmad et al, 2006;Simunic, 1986). We posit a positive relationship between the proxies of auditee complexity and audit fees; the implication of this being that more subsidiaries and high proportion of inventory to total assets ratio will result in greater amount of audit effort (Chan et al, 1993;Mustapha & Ahmad, 2011). We also include the ratio of return on assets (ROA), i.e., net profit before tax over total assets to control for auditee riskiness.…”