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Revisiting Agency Theory: Evidence of Board Independence and Agency Cost from Bangladesh

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Abstract

This study examines the influence of board independence on firm agency cost among listed firms in Bangladesh, which feature concentrated ownership and high insider representation on corporate boards. This study uses three measures of agency cost: the ‘expense ratio’, the ‘Q-free cash flow interaction’ and the ‘asset utilization ratio’. The finding of the study is that board independence can reduce the firm agency cost only under ‘asset utilization ratio’ measure of agency cost. These findings are robust to several robustness tests. Furthermore, the non-linearity tests suggest that the benefit of outside independent directors is generally plausible as a factor controlling agency costs in the case of a medium level of board independence. Overall, these findings do not reject the validity of agency theory, supporting the Anglo-American orthodoxy promoting outside independent directors as good monitors.

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Notes

  1. In such a board system, both the executive and non-executive directors perform duties together in one organizational layer.

  2. France has a mixture of unitary and two-tier board system (see Charreaux and Wirtz 2007).

  3. Bangladesh was a former British colony and inherited the common legal systems based on English common law (as opposed to civil law). The two-tier board is common in civil law countries (Rose 2005).

  4. The United Kingdom’s Higgs Report 2003 suggests that a non-executive director is not independent if s/he is a former employee or has had any other material connection with the company within the previous 5 years.

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Rashid, A. Revisiting Agency Theory: Evidence of Board Independence and Agency Cost from Bangladesh. J Bus Ethics 130, 181–198 (2015). https://doi.org/10.1007/s10551-014-2211-y

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