Influence of Ownership Type and CEO Power on Residual Loss: Evidence From the Global Microfinance Industry

Abstract

This study examines whether the agency cost component referred to as “residual loss” differs between nonprofit and shareholder-owned microfinance organizations and whether such costs are further influenced by CEO power. We use operating expenses, asset utilization, liquidity, and tangible asset intensity to proxy for residual loss. Using 374 microfinance organizations located in 76 countries, we find evidence that the residual loss is higher in microfinance organizations incorporated as nonprofits, but only if the CEO is powerful. Our empirical evidence illustrates the importance of installing proper governance mechanisms to minimize costs caused by high managerial power in the nonprofit sector. When CEOs are not powerful, nonprofits appear to have lower residual loss than for-profit organizations do, consistent with a motivated agent perspective. An important message of our study is that traditional agency theory perspectives might be ill-suited to analyze residual loss as a function of the nonprofit versus for-profit organizational form.