EconPapers    
Economics at your fingertips  
 

Firm Size, Corporate Debt, R&D Activity, and Agency Costs: Exploring Dynamic and Non-Linear Effects

Giorgio Canarella and Stephen Miller

No 2019-05, Working papers from University of Connecticut, Department of Economics

Abstract: This paper empirically investigates firm-specific determinants of agency costs, a relatively new and unexplored area in corporate finance. We estimate dynamic agency costs models, linking debt, firm size, and R&D activity to agency costs for a panel of U.S. information and communication technology (ICT) firms over 1990-2013. We adopt the Blundell and Bond (1998) two-step system GMM technique, which explicitly accounts for persistence, endogeneity, and unobservable firm heterogeneity. We provide the first evidence that our inverse proxy for agency costs, namely asset turnover (Ang, et al., 2000), exhibits an inverted U-shaped relationship with debt and a U-shaped relationship with firm size and R&D activity. These findings imply that agency costs experience a minimum value (in case of debt) and a maximum value (in case of firm size and R&D activity) and, therefore, that agency costs are higher at both low and high levels of debt, and lower at both low and high levels of firm size and R&D activity. We find that the level of debt of the average firm in the sample falls below the level that minimizes agency costs. We also document that, consistent with the agency literature, short-term debt provides an additional effective monitoring mechanism to alleviate agency costs. Our findings reveal that agency costs are dynamic in nature, mean-reverting, and persistent over time. This notion confirms the Florackis and Ozkan (2009) conjecture that managers behave as though an optimal level of agency costs exist that they pursue. Finally, we find a positive association between firm profitability and agency costs and a negative association between agency costs and firm growth. Extensive additional analysis confirms the robustness of our results.

Keywords: ICT industry; agency costs; non-linearity; dynamic adjustment; system GMM (search for similar items in EconPapers)
JEL-codes: G21 G28 G32 G34 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2019-03
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-ict, nep-ppm and nep-sbm
Note: Stephen Miller is the corresponding author
References: Add references at CitEc
Citations:

Downloads: (external link)
https://media.economics.uconn.edu/working/2019-05.pdf Full text (application/pdf)

Related works:
Journal Article: Firm size, corporate debt, R&D activity, and agency costs: Exploring dynamic and non-linear effects (2022) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:uct:uconnp:2019-05

Access Statistics for this paper

More papers in Working papers from University of Connecticut, Department of Economics University of Connecticut 365 Fairfield Way, Unit 1063 Storrs, CT 06269-1063. Contact information at EDIRC.
Bibliographic data for series maintained by Mark McConnel (mark.mcconnel@uconn.edu).

 
Page updated 2025-01-04
Handle: RePEc:uct:uconnp:2019-05