Journal of Business Ethics

, Volume 137, Issue 3, pp 609–621 | Cite as

Managerial Ownership and Agency Cost: Evidence from Bangladesh

  • Afzalur RashidEmail author


This study examines the influence of managerial ownership on firm agency costs among listed firms in Bangladesh. This is an institutional setting that features a mixture of agency costs. This institutional setting has a concentration of ownership by managers, but the firms are not solely owned by managers. The extant literature suggests that the sacrifice of wealth by the principal and potential costs associated with monitoring the agents is known as the agency cost. This study uses three measures of agency cost: the ‘expense ratio’, the ‘Q-free cash flow interaction’, and the ‘asset utilisation ratio’. The finding of the study is that managerial ownership reduces the firm agency cost only under the ‘asset utilisation ratio’ measure of agency cost; this is robust with regard to a number of robustness tests. Furthermore, the non-linearity tests suggest that the convergence of interest is evident with very high and low levels of managerial ownership. The entrenchment effect by the owners is evident at moderate levels of managerial ownership. Although there has been great scepticism among management researchers on the validity of agency theory, overall, the findings of this study do not reject the validity of agency theory. Given that the entrenchment by managers is evident at certain levels of ownership and that the agency problem may still exist between insiders and outsiders, legislative guidelines for controlling share ownership may be required.


Agency theory Agency cost Bangladesh Control Corporate governance Stewardship theory 

JEL Classification

G32 G34 


  1. Ahmed, K., Hossain, M., & Adams, M. B. (2006). The effects of board composition and board size on the informativeness of annual accounting earnings. Corporate Governance: An International Review, 14(5), 418–438.CrossRefGoogle Scholar
  2. Ang, J. S., Cole, R. A., & Lin, J. W. (2000). Agency cost and ownership structures. The Journal of Finance, 55(1), 81–106.CrossRefGoogle Scholar
  3. Bangladesh Companies Act 1994, Ministry of Commerce, Dhaka: Government of the Peoples Republic of BangladeshGoogle Scholar
  4. Brau, J. C. (2002). Do banks price owner-manager agency costs? An examination of small business borrowing. Journal of Small Business Management, 40(4), 273–286.CrossRefGoogle Scholar
  5. Chakravarthy, B. S. (1986). Measuring strategic performance. Strategic Management Journal, 7(5), 437–458.CrossRefGoogle Scholar
  6. Chen, Y. Y., & Young, M. N. (2010). Cross-border mergers and acquisitions by Chinese listed companies: A principal-principal perspective. Asia Pacific Journal of Management, 27(3), 523–539.CrossRefGoogle Scholar
  7. Cho, M. H. (1998). Ownership structure investment, and the corporate value: An empirical analysis. Journal of Financial Economics, 47(1), 103–121.CrossRefGoogle Scholar
  8. Coakes, S. J., & Steed, L. G. (2001). SPSS analysis without anguish. Sydney: Wiley Australia Ltd.Google Scholar
  9. Colombo, M. G., Croce, A., & Murtinu, S. (2014). Ownership structure, horizontal agency cost and the performance of high-tech entrepreneurial firms. Small Business Economics, 42(2), 265–282.CrossRefGoogle Scholar
  10. Core, J. E., Holthausen, R. W., & Larcker, D. F. (1999). Corporate governance, chief executive officer compensation and firm performance. Journal of Financial Economics, 51(3), 371–406.CrossRefGoogle Scholar
  11. Dalton, D. R., Daily, C. M., Ellstrand, A. E., & Johnson, J. L. (1998). Meta-analytic review of board composition, leadership structure and financial performance. Strategic Management Journal, 19(3), 269–290.CrossRefGoogle Scholar
  12. DataStream (2013), Monthly Share Price of Dhaka Stock Exchange 2000–2013, Available at: DataStream (Viewed on December 2013).Google Scholar
  13. Deegan, C. (2005). Australian financial accounting (4th ed.). Sydney: McGraw Hill Australia Pty Ltd.Google Scholar
  14. Deegan, C. (2006). Financial accounting theory (2nd ed.). Sydney: McGraw Hill Australia Pty Ltd.Google Scholar
  15. Demsetz, H. (1983). The structure of ownership and the theory of the firm. Journal of Law and Economics, 26(2), 375–390.CrossRefGoogle Scholar
  16. Demsetz, H., & Lehn, K. (1985). The Structure of corporate ownership: Causes and consequences. Journal of Political Economy, 93(6), 1155–1177.CrossRefGoogle Scholar
  17. Dhaka Stock Exchange (2013), Yearly Share Price of Dhaka Stock Exchange 2000–2013, Available at: Dhaka Stock Exchange, Available at (Viewed on various dates between the year 2006 and 2013).
  18. Dharwadkar, R., George, G., & Brandes, P. (2000). Privatization in emerging economies: An agency theory perspective. Academy of Management Review, 25(3), 650–659.Google Scholar
  19. Dielman, T. E. (2001). Applied regression analysis (3rd ed.). Duxbury: Thomson Learning.Google Scholar
  20. Donaldson, L., & Davis, J. H. (1991). Stewardship theory or agency theory: CEO governance and shareholder returns. Australian Journal of Management, 16(1), 49–69.CrossRefGoogle Scholar
  21. Donaldson, L., & Davis, J. H. (1994). Boards and company performance-research challenges the conventional wisdom. Corporate Governance an International Review, 2(3), 151–160.CrossRefGoogle Scholar
  22. Doukas, J., Kim, C., & Pantzalis, C. (2000). Security analysis, agency costs and company characteristics. Financial Analysts Journal, 56(6), 54–63.CrossRefGoogle Scholar
  23. Eisenhardt, K. M. (1989). Agency theory: An assessment and review. The Academy of Management Review, 14(1), 57–74.Google Scholar
  24. Farrar, J. (2005). Corporate governance: Theories, principles and practice (2nd ed.). South Melbourne, VIC: Oxford University Press.Google Scholar
  25. Fleming, G., Heaney, R., & McCosker, R. (2005). Agency costs and ownership structure in Australia. Pacific-Basin Finance Journal, 13(1), 29–52.CrossRefGoogle Scholar
  26. Florackis, C. (2008). Agency costs and corporate governance mechanisms: Evidence for UK firms. International Journal of Managerial Finance, 4(1), 37–59.CrossRefGoogle Scholar
  27. Godfrey, J., Hodgson, A., Holmes, S., & Tarca, A. (2006). Accounting theory (6th ed.). Milton: Wiley.Google Scholar
  28. Goyal, V. K., & Park, C. W. (2002). Board leadership structure and CEO turnover. Journal of Corporate Finance, 8(1), 49–66.CrossRefGoogle Scholar
  29. Gujarati, D. (2003). Basic econometrics (4th ed.). New York: McGraw-Hill.Google Scholar
  30. Hampel Report (1998), Hampel committee: Final Report 1998, European Corporate Governance Institute, Online version available at (Accessed on 4th May 2008).
  31. Healy, P. M. (1985). The effect of bonus schemes on accounting decisions. Journal of Accounting and Economics, 7(1–3), 85–107.CrossRefGoogle Scholar
  32. Henry, D. (2010). Agency Cost, ownership structure and corporate governance compliance: A private contracting. Pacific-Basin Finance Journal, 18(1), 24–46.CrossRefGoogle Scholar
  33. Hermalin, B., & Weisbach, M. (1988). The Determinants of Board Composition. Rand Journal of Economics, 19(4), 589–606.CrossRefGoogle Scholar
  34. Hills, R. C., & Adkins, L. C. (2003). Collinearity. In B. Baltagi (Ed.), A companion to theoretical econometrics. Oxford: Blackwell Publishing.Google Scholar
  35. Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance and takeovers. American Economic Review, 76(2), 323–329.Google Scholar
  36. Jensen, M. C. (1993). The modern industrial revolution, exit and the failure of internal control systems. The Journal of Finance, 48(3), 831–880.CrossRefGoogle Scholar
  37. Jensen, M. C., & Meckling, W. J. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360.CrossRefGoogle Scholar
  38. Kiel, G. C., & Nicholson, G. J. (2003). Board composition and corporate performance: How the Australian experience informs contrasting theories of corporate governance. Corporate Governance an International Review, 11(3), 189–205.CrossRefGoogle Scholar
  39. Kole, S. R. (1995). Measuring managerial equity ownership: A comparison of sources of ownership data. Journal of Corporate Finance, 1(3–4), 413–435.CrossRefGoogle Scholar
  40. Lehn, K., & Poulsen, A. (1989). Free cash flow and stockholder gains in going private transactions. Journal of Finance, 44(3), 774–789.CrossRefGoogle Scholar
  41. Linck, J. S., Netter, J. M., & Yang, T. (2008). The determinants of board structure. Journal of Financial Economics, 87(2), 308–328.CrossRefGoogle Scholar
  42. Maassen, G. F. (2002). An international comparison of corporate governance models (3rd ed.). Amsterdam, Netherlands: Spencer Stuart.Google Scholar
  43. Mahoney, L., & Roberts, R. W. (2007). Corporate social performance, financial performance and institutional ownership in Canadian firms. Accounting Forum, 31(3), 233–253.CrossRefGoogle Scholar
  44. Majumdar, S. K., & Chhibber, P. (1999). Capital structure and performance: Evidence from a transition economy on an aspect of corporate governance. Public Choice, 98(3–4), 287–305.CrossRefGoogle Scholar
  45. McConnell, J. J., & Servaes, H. (1990). Additional evidence on equity ownership and corporate value. Journal of Financial Economics, 27(2), 595–612.CrossRefGoogle Scholar
  46. McKnight, P. J., & Weir, C. (2009). Agency costs, corporate governance mechanisms and ownership structure in large UK publicly quoted companies: A panel data analysis. The Quarterly Review of Economics and Finance, 49(2), 139–158.CrossRefGoogle Scholar
  47. Morck, R. K., Shleifer, A., & Vishny, R. W. (1988). Management ownership and market valuation: An empirical analysis. Journal of Financial Economics, 20(1–2), 293–315.CrossRefGoogle Scholar
  48. Nicholson, G., & Kiel, G. (2007). Can directors impact performance? A case based test of three theories of corporate governance. Corporate Governance: An International Review, 15(4), 585–608.CrossRefGoogle Scholar
  49. Rappaport, A. (1997). Creating shareholder value–A guide for manager and investors. New York: The Free Press.Google Scholar
  50. Rashid, A. (2010). CEO duality and firm performance: Evidence from a developing country. Corporate Ownership and Control, 8(1), 163–175.Google Scholar
  51. Rashid, A. (2011). Corporate governance in Bangladesh: A quest for the accountability or legitimacy crisis? Research in Accounting in Emerging Economies, 11, 1–34.Google Scholar
  52. Rashid, A. (2013a). CEO duality and agency cost: Evidence from Bangladesh. Journal of Management and Governance, 17(4), 989–1008.CrossRefGoogle Scholar
  53. Rashid, A. (2013b). Corporate governance, executive pay and firm performance: Evidence from Bangladesh. International Journal of Management, 30(2), 556–575.Google Scholar
  54. Rashid, A. (2014). Revisiting agency theory: Evidence of board independence and agency cost from Bangladesh. Journal of Business Ethics. doi: 10.1007/s10551-014-2211-y.
  55. Rashid, A., De Zoysa, A., Lodh, S., & Rudkin, K. (2010). Board composition and firm performance: Evidence from Bangladesh. Australasian Accounting Business and Finance Journal, 4(1), 76–95.Google Scholar
  56. Rashid, A., & Hoque, A. (2011). Corporate capital structure and firm performance: Evidence from Bangladesh. Academy of Taiwan Business Management Review, 7(2), 59–72.Google Scholar
  57. Rashid, A., & Lodh, S. C. (2008). The influence of ownership structures and board practices on corporate social disclosures in Bangladesh. Research in Accounting in Emerging Economies, 8, 211–237.CrossRefGoogle Scholar
  58. Review, Monthly. (2013). Monthly review of Dhaka stock exchange 2006–2009. Dhaka: Dhaka Stock Exchange.Google Scholar
  59. Short, H., & Keasey, K. (1999). Managerial ownership and performance of firm-evidence from UK. Journal of Corporate Finance, 5(1), 79–101.CrossRefGoogle Scholar
  60. Singh, M., & Davidson III, W. N. (2003). Agency cost, ownership structure and corporate governance mechanisms. Journal of Banking & Finance, 27(5), 793–816.CrossRefGoogle Scholar
  61. Sobhan, F. and Werner, W. (2003), A Comparative Analysis of Corporate Governance in South Asia: Charting a Roadmap for Bangladesh, Dhaka: Bangladesh Enterprise Institute, Available (Accessed on 5th July 2005).
  62. Uddin, S., & Choudhury, J. (2008). Rationality, traditionalism and state of corporate governance: Illustrious from a less-developed country. Accounting Auditing and Accountability Journal, 21(7), 1026–1051.CrossRefGoogle Scholar
  63. Walsh, J. P., & Seward, J. K. (1990). On the efficiency of internal and external corporate control mechanism. The Academy of Management Review, 15(3), 421–458.Google Scholar
  64. Wellalage, H. N., & Locke, S. (2012). An empirical investigation of agency costs and ownership structure in unlisted small businesses. New Zealand Journal of Applied Business Research, 10(2), 37–48.Google Scholar
  65. White, H. (1980). A heteroskedasticity consistent covariance matrix estimator and a direct test for heteroskedasticity. Econometrica, 48(4), 817–838.CrossRefGoogle Scholar
  66. Wiwattanakantang, Y. (2001). Controlling shareholders and corporate value-evidence from Thailand. Pacific-Basin Finance Journal, 9(4), 323–362.CrossRefGoogle Scholar
  67. Young, M. N., Peng, M. W., Ahlstrom, D., Bruton, G. D., & Jiang, Y. (2008). Corporate governance in emerging economies: A review of the principal-principal perspective. Journal of Management Studies, 45(1), 196–220.CrossRefGoogle Scholar
  68. Zhou, X. (2001). Understanding the determinants of managerial ownership and the link between ownership and performance: Comment. Journal of Financial Economics, 62(3), 559–571.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media Dordrecht 2015

Authors and Affiliations

  1. 1.School of CommerceUniversity of Southern QueenslandToowoombaAustralia

Personalised recommendations