What Reduces the Impact of Managerial Entrenchment on Agency Costs? Evidence for UK Firms

Chris Florackis (c.florackis@liv.ac.uk) and Aydin Ozkan

Discussion Papers from Department of Economics, University of York

Abstract: This paper examines how managerial entrenchment, defined as the extent to which managers are able to use their discretion and expropriate wealth from shareholders, influences agency costs. Using a cross-sectional regression framework and a large sample of UK listed firms, we show that there is a negative relationship between our inverse proxy for agency costs, namely asset turnover ratio, and managerial entrenchment. However, it seems that the relation between managerial entrenchment and agency costs depends on managerial incentives. Specifically, there is strong evidence that managerial incentive variables, such as executive ownership and market-to-book ratio, moderate the negative relationship between managerial entrenchment and asset turnover.

Keywords: Agency costs; managerial entrenchment; corporate governance mechanisms (search for similar items in EconPapers)
JEL-codes: G3 G32 (search for similar items in EconPapers)
Date: 2006-01
New Economics Papers: this item is included in nep-bec and nep-fin
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