Large banks and small banks can impact agency costs differently. The current study considers a panel data of 30 Indian banks before the merger to reveal the relationship between agency cost and board composition using panel regression models. The agency cost is reflected in three measures: Asset turnover ratio, free cash flow and leverage ratio. Board composition is sub-divided into three groups: board structure, board independence and board diversity. The finding of the study for large banks shows that former CEO, number of employee representatives on board, independent chairperson, CEO duality, bank age and size impacts agency cost. On the other hand, for small banks, results prove that bank age, employee representative on board and CEO duality significantly affects agency cost. Therefore, in the current Indian context of banking merger and governmental directives to increase lending to micro, small and medium enterprises, the focus should be shifted more on increasing managerial productivity and increasing leverage. Hence, the emphasis should not be on increasing governmental representatives on the banking board but to enhance bank governance quality and its monitoring. To this end, the current article can potentially provide valuable insights for sustainable and real economic outcomes.
AgrawalA., & KnoeberC. R. (1996). Firm performance and mechanisms to control agency problems between managers and shareholders. The Journal of Financial and Quantitative Analysis, 31(3), 377–397.
2.
AktasN., AndreouP. C., KarasamaniI., & PhilipD. (2019). CEO duality, agency costs, and internal capital allocation efficiency. British Journal of Management, 30(2), 473–493. https://doi.org/10.1111/1467-8551.12277
3.
AngJ. S., ColeR. A., & LinJ. W. U. H. (2000). Agency costs and ownership structure. The Journal of Finance, 55(1), 1–26.
4.
BaltagiB. H. (Ed) (2001). A companion to theoretical econometrics (1st ed.). https://doi.org/10.1002/9780470996249
5.
BaysingerB. D., & ButlerH. N. (1985). Corporate governance and the board of directors: Performance effects of changes in board composition. Journal of Law, Economics, & Organization, 1(1), 101–124.
6.
BeinerS., DrobetzD. W., SchmidF., & ZimmermannH. (2004). Is board size an independent corporate governance mechanism? International Review of Social Sciences, 57(3), 327–356. https://doi.org/10.1111/j.0023-5962.2004.00257.x
7.
BorokhovichK. A., ParrinoR., & TrapaniT. (1996). Outside directors and CEO selection. The Journal of Financial and Quantitative Analysis, 31(3), 337–355.
8.
BrennanN. (2006). Boards of directors and firm performance: Is there an expectations gap? Corporate Governance: An International Review, 14(6), 577–593.
9.
BrickleyJ. A., ColesJ. L., & TerryR. L. (1994). Outside directors and the adoption of poison pills. Journal of Financial Economics, 35(January 1993), 371–390.
10.
ByrdJ. W. (2010). Financial policies and the agency costs of free cash flow: Evidence from the oil industry. International Review of Accounting, Banking and Finance, 2, 23–50.
11.
ByrdJ. W., & HickmanK. A. (1992). Do outside directors monitor managers? Evidence from tender offer bids. Journal of Financial Economics, 32(2), 195–221.
12.
DaltonD. R., CatherineD. M., EllstrandA. E., & JohnsonJ. L. (1998). Meta-analytic reviews of board composition, leadership structure, and financial performance. Strategic Management Journal, 19(3), 269–290.
13.
DavidsonW. N., BouresliA. K., & SinghM. (2006). Agency costs, ownership structure, and corporate governance in pre-and post-IPO firms. Corporate Ownership & Control, 3(3), 88–95.
14.
DemsetzH., & LehnK. (2014). The structure of corporate ownership: Causes and consequences. Journal of Political Economy, 93(6), 1155–1177.
15.
DoukasJ. A., KimC., & PantzalisC. (2000). Security analysis, Agency costs, and company characteristics. Financial Analysts Journal, 56(6), 54–63.
16.
EasterbrookF. H. (1984). Two agency-cost explanations of dividends. The American Economic Review, 74(4), 650–659.
17.
EisenbergT., SundgrenS., & WellsM. T. (1998). Larger board size and decreasing firm value in small firms. Journal of Financial Economics, 48(1), 35–54.
18.
FahlenbrachR., MintonB. A., & PanC. H. (2011). The society for financial studies former CEO directors: Lingering CEOs or valuable resources? The Review of Financial Studies, 24(10), 3486–3518.
19.
FakherH., & AbdelfettahB. (2012). Board of directors and financial decisions of Tunisian firms Hentati Fakher. African J. Accounting, Auditing and Finance, 1(1), 101–112.
20.
FauverL., & FuerstM. E. (2006). Does good corporate governance include employee representation? Evidence from German corporate boards. Journal of Financial Economics, 86(3), 673–710.
21.
FinkelsteinS., & HambrickD. C. (1996). Strategic leadership: Top executives and their effects on organizations. Donaldson Reviews, 22(2), 221–224.
22.
FlemingG., HeaneyR., & MccoskerR. (2005). Agency costs and ownership structure in Australia. Pacific-Basin Finance Journal, 13, 29–52. https://doi.org/10.1016/j.pacfin.2004.04.001
23.
FlorackisC., & OzkanA. (2008). Agency costs and corporate governance mechanisms: Evidence for UK firms. International Journal of Managerial Finance, 4, 37–59.
24.
GodfreyP. C., MerrillC. B., & HansenJ. M. (2009). The relationship between corporate social responsibility and shareholder value: An empirical test of the risk management hypothesis. Strategic Management Journal, 30(4), 425–445. https://doi.org/10.1002/smj
25.
GoyalV. K., & ParkC. W. (2001). Board leadership structure and CEO turnover. Journal of Corporate Finance, 8(1), 49–66.
26.
GuillenM. F. (2000). Business groups in emerging economies: A resource-based view. Academy of Management Journal, 43(3), 362–380.
27.
HenryD. (2010). Agency costs, ownership structure and corporate governance compliance: A private contracting perspective. Pacific-Basin Finance Journal, 18, 24–26. https://doi.org/10.1016/j.pac
28.
HermalinB. E., & WeisbachM. S. (2003). Boards of directors as an endogenously determined institution: A survey of the economic literature. FRBNY Economic Policy Review, 9(April), 7–26.
29.
HoaglinD. C. (2003). John W. Tukey and data analysis. Statistical Science, 18(3), 311–318.
30.
HsiaoC. (2014). Analysis of panel data. https://doi.org/10.1017/CBO9781139839327
31.
PearceJ. A., & ZahraS. A. (1991). The relative power of CEOs and boards of directors: Associations with corporate performance. Strategic Management Journal, 12, 135–153.
32.
JensenC., & MecklingH. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360.
33.
JensenM. C. (1986). American economic association agency costs of free cash flow, corporate finance, and takeovers. The American Economic Review, 76(2), 323–329.
34.
JensenM. C. (1993). The modern industrial revolution, exit, and the failure of internal control systems. The Journal of Finance, XLVIII(3), 831–880.
35.
JensenM., & MurphyK. (1990). Performance pay and top-management incentives. Journal of Political Economy, 98(2), 225–264.
36.
JirapornP., KimJ., & KimY. S. (2011). Dividend payouts and corporate governance quality: An empirical investigation. The Financial Review, 46(2), 251–279.
37.
JonssonE. I. (2005). The role model of the board: A preliminary study of the roles of Icelandic boards. Corporate Governance: An International Review, 13(5), 710–717.
38.
KhanM. K., KaleemP. A., & NazirM. S. (2012). Impact of firm capital structure decisions on debt agency problem: Evidence for Pakistan. Journal of Basic Applied Science and Research, 2(8), 7897–7905.
39.
LawrenceJ., & StapledonG. (1999). Do independent directors add value?In Centre for Corporate Law and Securities Regulation. The University of Melbourne.
40.
MaassenG. F. (1999). An international comparison of corporate governance models [PhD Thesis]. Rotterdam School of Management.
41.
McKnightP. J., & WeirC. (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. https://doi.org/10.1016/j.qref.2007.09.008
42.
MostellerF., & TukeyJ. (1977). Data analysis and regression: A second course in statistics (1st ed.). Addison Wesley.
43.
Owusu-AntwiG., BanerjeeR., & OfeiP. (2018). Ownership structure and bank performance: Empirical evidence from the UAE. Asian Economic and Financial Review, 8(12), 1422–1438. https://doi.org/10.18488/journal.aefr.2018.812.1422.1438
44.
QuigleyT. J., & HambrickD. C. (2012). When the former CEO stays on as board chair: Effects on successor discretion, strategic change, and performance. Strategic Management Journal, 33, 834–859. https://doi.org/10.1002/smj
45.
RahejaC. G. (2005). Determinants of board size and composition: A theory of corporate boards. Journal of Financial and Quantitative Analysis, 40(2), 283–306.
46.
RashidA. (2012). CEO duality and agency cost: Evidence from Bangladesh. Journal of Management and Governance, 17(4), 989–1008. https://doi.org/10.1007/s10997-012-9213-x
47.
RashidA. (2015). Revisiting agency theory: Evidence of board independence and agency cost from Bangladesh. Journal of Business Ethics, 130(1), 181–198. https://doi.org/10.1007/s10551-014-2211-y
48.
RodriguezR. P.Jr, SalterS. B., & SmithL. M. (2015). An examination of the agency theory problem of earnings management: Is it an Anglo-Saxon cultural phenomenon? International Journal Critical Accounting, 7(5/6), 487–511.
49.
RossS. A. (1973). The economic theory of agency: The principal’s problem. The American Economic Review, 63(2), 134–139.
50.
RozeffM. S. (1982). Growth, beta and agency costs as determinants of dividend payout ratios. The Journal of Financial Research, 5(3), 249–259.
51.
ShleiferA., & VishnyR. W. (1997). A survey of corporate governance. The Journal of Finance, 52(2), 737–783.
52.
SimpsonW. G., & GleasonA. E. (1999). Board structure, ownership, and financial distress in banking firms. International Review of Economics and Finance, 8(3), 281–292.
53.
SinghM., & DavidsonW. N. (2003). Agency costs, ownership structure and corporate governance mechanisms. Journal of Banking & Finance, 27, 793–816. https://doi.org/10.1016/S0378-4266(01)00260-6
54.
SmithA., TennentK. D., & RussellJ. (2019). Berle and Means’s the modern corporation and private property: The military roots of a stakeholder model of corporate governance. Seattle University Law Review, 42(2), 535–563.
55.
StuartR., & JeffreyW. G. (1990). Outside directors, board independence, and shareholder wealth. Journal of Financial Economics, 26(2), 175–191.
56.
TianJ. J., & LauC. (2001). Board composition, leadership structure and performance in Chinese. Asia Pacific Journal of Management, 18(2), 245–263.
57.
VictorinA. (2000). Employee participation on the company board: The Swedish experience. Company Law Reform in OECD Countries: A Comparative Outlook of Current Trends, 12, 1–9.
58.
WestphalJ. D., & ZajacE. J. (1995). Who shall govern? Demographic similarity, and new director selection. Administrative Science Quarterly, 40(1), 60–83.
59.
WisemanR. M., Cuevas-RodríguezG., & Gomez-MejiaL. R. (2012). Towards a social theory of agency. Journal of Management Studies, 49(1), 202–222. https://doi.org/10.1111/j.1467-6486.2011.01016.x
60.
WuL. (2004). The impact of ownership structure on debt financing of Japanese firms with the agency cost of free cash flow. SSRN Electronic Journal, 852, 1–39.
61.
ZahraS. A., & PearceJ. A. (1989). Boards of directors and corporate financial performance: A review and integrative model. Journal of Management, 15(2), 291–334. https://doi.org/10.1177/014920638901500208
