Article2018

The impact of external and internal corporate governance mechanisms on agency costs

74 citations0/0 files storedCorporate Governance

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Auditing, Earnings Management, Governance Corporate Finance and Governance Corporate Governance and Financial Management

Abstract

Purpose The purpose of this paper is to investigate the impact of external and internal corporate governance mechanisms on agency costs. Design/methodology/approach The author uses data from German firms that were listed in the regulated market of the Frankfurt Stock exchange during 2006-2011. Agency costs were measured using stochastic frontier analysis, a relatively new approach to estimate agency costs. The regression analysis is applied to test the model. Findings The results indicate that an industry specialized audit firm, the presence of a large audit firm, abnormal audit fees, management ownership and variable management compensation are significantly negatively associated with the level of a firms’ agency costs. In contrast, this seems not to be true for the existence of an audit committee for which the results of the paper document a non-significant association. Originality/value The paper contributes to the existing literature in several ways. First, the research design is to the best of the authors’ knowledge the first that investigates the influence of different corporate governance mechanisms on the level of agency costs. Second, previous studies are mainly focused on the US audit market. This focus on the US audit market leaves uncertainties regarding the direction and magnitude of the empirical relationship in the European and German environmental context. Finally, the paper provides initial empirical evidence for a sample of German IFRS listed companies (IFRS – International Financial Reporting Standards).

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1997A Survey of Corporate Governance 1993The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems 2000Investor protection and corporate governance 2003Earnings management and investor protection: an international comparison 2002Audit committee, board of director characteristics, and earnings management 1984Methodological Issues Related to the Estimation of Financial Distress Prediction Models 2003Earnings management and corporate governance: the role of the board and the audit committee

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