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Determining Agency Theory Framework through Financial Leverage & Insider Ownership

Hafiz Mustansar Javaid and Snober Javid

International Journal of Economics and Finance, 2017, vol. 9, issue 3, 21-28

Abstract: Sound practices of corporate governance help firms to lift their performance and bring in investors¡¯ confidence while enabling shareholders¡¯ rights protection, qualifying the legal requirements and spotlight the vast public image about how they are operating their business. Most of the previous literature on agency theory in Pakistan has demonstrated connection among ownership structure on firm performance, value and profitability. This study extends the literature by proposing the effect of change in leverage & insider equity ownership on agency cost mitigation. Proxy is used to measure agency cost: Expense ratio: Operating expense / annual sales. We applied ¡°Fixed effect¡± method on sample of 41 non-financial firms from four economic groups listed in Pakistan Stock Exchange from the period of 2010-2014. The practical implications of the study is that those investors who desire long term performance of the firm may perhaps invested in those firms which are owned by insiders or containing acceptable amount of debt, for the reason that such firms try to maintain & continue long term performance by agency cost minimization & shareholders¡¯ interests protections.

Keywords: agency cost; block-holders; insider equity ownership; entrenchment effect (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:ibn:ijefaa:v:9:y:2017:i:3:p:21-28