Market concentration, agency cost and firm performance: a case study on Indian corporate firms

Ujjayini Roy () and Indrani Chakraborty ()
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Ujjayini Roy: University of Delhi
Indrani Chakraborty: Institute of Development Studies Kolkata

Economic Change and Restructuring, 2023, vol. 56, issue 4, No 21, 2645-2693

Abstract: Abstract This paper explores the relationship between market concentration, agency cost and firm performance using an unbalanced panel of 1911 publicly listed manufacturing firms in India for the period 2001 to 2020. It classifies firms according to ownership types and evaluates the effects of agency cost and market concentration on performance of firms. The study considers agency costs that result from principal-agent (PA agency costs) as well as from principal-principal conflicts (PP agency cost). Additionally, it shows how the interaction between various concentration indices and agency costs (PP and PA agency prices) affects performance. Using a generalized methods of moments technique to estimate three dynamic models, the study finds that both types of agency costs have a strong negative impact on performance, market concentration has a negative impact but is limited to certain types of firms and the combined effects between concentration and agency cost are strong which shows that an increase in market concentration causes a decline in performance due to an increase in agency cost. Thus, our findings support the prediction that competition acts as a disciplining device to reduce agency costs which in turn helps to reduce managerial slack and improve firm performance. Our study has several policy implications.

Keywords: Industry concentration; Price cost margin; Agency cost; Tobin’s Q; Returns on assets; Corporate firms (search for similar items in EconPapers)
JEL-codes: C33 C36 D22 L22 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s10644-023-09529-1

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