Agency problem

Topics: Governance, Corporate governance, Stock market Pages: 17 (2489 words) Published: October 13, 2014

Objective of study
The objective is to investigate how principle-principle agency conflicts impact on the quality and effectiveness of corporate governance in European listed companies.

Motivation for study
Most of corporate governance research only reveals that corporate governance can solute the agency conflicts between management and shareholders which fails to identify principle-principle agency conflicts and their influences on corporate governance.

Research question
Whether more severe principal-principal conflict is relevant with weaker corporate governance and whether the severity of the conflict affects the effectiveness of corporate governance and firm value with certain complementarities.

Contribution of study
Firstly, using the severity of the principal-principal conflicts to explain a sample of the quality and effectiveness of corporate governance. Secondly, majority shareholders consider about the costs of installing good governance. Thirdly, it shows how institutional factors impact on the decisions and outcomes of companies. Finally, it contributes to corporate control literature that develop an aggregate measure to exceed pure ownership structures in capturing the severity of the principle-principle conflict.

Literature review and Hypotheses
The study focuses on the “open system” approach providing the impact of the environment factors to the costs, contingencies, complementarities and organizational outcome (Aguilera et al., 2008). Two hypotheses on how the severity of the incongruity among shareholder groups in a corporation impacts to the quality of Corporate Governance and Corporate Governance effectiveness were presented by the researchers in accordance with this approach.

Principal-Principal Conflict and Good Corporate Governance: The researchers concentrate on the ownership structure and corporate governance regulatory procedure in Europe to study on the way in which the severity of principal-principal conflict influence good Corporate Governance. From previous study, the majority of agency conflict problem in Europe is horizontal agency conflict which occurs between large shareholders and other shareholders (Denis& McConnell, 2003; Faccio& Lang, 2002; Federowicz& Aguilera, 2003; Gospel& Pendleton, 2005; Thomsen et al., 2006). Large shareholders may reduce vertical agency problem (Shleifer& Vishny, 1986). On the other hand, this concentrated ownership structure may lead to serve principle- principle conflict (Bebchuk, 1999; Faccio, Lang, &Young, 2001; Shleifer & Vishny, 1997). Since good corporate governance in this study emphasizes on the governance structures for the protection of minority shareholders, there may be the tendency for the majority shareholders to discourage a good corporate governance.

This brings the researchers to the first hypothesis:

Principal-Principal Conflict and Corporate Governance Effectiveness: The outside shareholders expect good corporate governance as it leads to a better company performance (Renders et al., 2010). However, the level of corporate governance is able to be determined by the majority shareholders under strong concentrated ownership structure in Europe which usually below an optimal standard from minority shareholders’ aspect. Not only the improvement on corporate governance practice can protect the minority shareholders’ benefit and provide wealth equation between shareholders, but it also increase the value of the firm (Aguilera et al., 2008). Moreover, it was found that the stock market disclosure environment is a factor that can contribute to good corporate governance practice as well as leading to the minority shareholders’ protection. In the other word, the horizontal agency problem can be effectively solved in an intensive disclosure environment.

This contribute to the second hypothesis:

Data and Sample Selection
The initial sample consists of EU listed companies...
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