FREE CASH FLOW, MANAGERIAL OWNERSHIP, AND AGENCY COST: A NONLINEAR EVIDENCE FROM NIGERIAN QUOTED CONSUMER AND INDUSTRIAL GOODS FIRMS
Abstract
This study focuses on a nonlinear approach in assessing the effect of free cash flow and managerial ownership on the agency cost of firms listed under the Consumer and Industrial Goods sector in the Nigerian Stock Exchange (NSE). Based on the extant theories, firms with high free cash flow are more exposed to agency costs. Existing literature however shows that managerial ownership could moderate this tendency. In this study, we argue that the extent to which managerial ownership moderates the effect of free cash flow on firms’ agency costs is dependent upon the level of the ownership, and thus, the moderation effect is not entirely linear. The study therefore empirically investigates whether free cash flow has a significant positive effect on agency costs; whether managerial ownership has a nonlinear effect on free cash flow; and whether the moderating effect of managerial ownership on the association of free cash flow and agency costs is nonlinear (not the same at different levels <25% and above 25%). We estimate the panel regression using data from 2009 to 2015 to test three main hypotheses. We measured free cash flow using the cash flow approach and adopted the inverse of asset utilization to proxy for agency costs. The findings reveal that while free cash flow linearly and negatively affects agency costs, managerial ownership has a nonlinear effect on free cash flow and on the effect of free cash flow on agency costs. In line with the findings, this study concludes that managerial ownership is not a straight jacket remedy for tacking problems associated with agency costs that results from having excess free cash flow. Further studies should consider other proxies of agency costs.
1. Introduction
In this paper, we present our modest effort towards contributing to the debate on the relationship between free cash flow, managerial ownership, and agency cost. The study is motivated by the absence of studies that factor in the double edge nature of managerial equity ownership when considering it as a moderator on the relationship between free cash flow and agency cost.
Prior studies such as Wang (2010), Kargar and Ahmadi (2013), Elyasiani and Zhang (2015), Guizani (2018), and others documented that free cash flow is indeed a source of agency costs and as such is negatively related to asset utilization. Also, the free cash flow hypothesis forwarded by Jensen (1986) suggests that managerial ownership could moderate the effect of free cash flow as a source of agency cost. Iskandar et al. (2012) tested this and found that managerial ownership in fact moderates the effect of free cash flow on agency cost. However, Iskandar et al. (2012) did not focus on the nonlinear nature of managerial ownership in the context of agency relationships. This was clearly expounded in the entrenchment hypothesis, as forwarded by Stulz (1988) and Morck et al. (1988). With this additional insight, it follows, therefore, that, if managerial ownership is sought after for the purpose of aligning the manager’s interest with that of the firm (for goal congruency’s sake), then, this can work only up to a certain extent. As documented, by the proponents of the entrenchment hypothesis mentioned above, at a certain higher level of managerial ownership, managers’ interest is not in alignment with that of the firm. Jelinek and Stuerke (2009) documented evidence that lends credence to this. In their work, they documented how different levels of managerial ownerships affect agency costs differently. However, while Jelinek and Stuerke (2009) failed to look at how different levels of managerial ownership moderate the effect of free cash flow on agency cost, the work of Iskandar et al. (2012) ignored the nonlinear nature of managerial ownership in their moderation.
We contribute to the literature by factoring in the nonlinearity nature of managerial ownership as a moderator on the relationship between free cash flow and agency cost. The remaining paper is structured in the following order: Sec. 2 presents literature, while Sec. 3 explains the methodological aspect of the research. Data analysis is discussed in Sec. 4. Finally, Sec. 5 provides some concluding remarks.
2. Literature Review
2.1. Managerial ownership and free cash flow
Based on the agency theory perspective, insider holding (managerial ownership) can reduce the gap in the conflicting interests between a firm and its agents (managers) (Jensen and Meckling, 1976). Further, the free cash flow hypothesis as forwarded in Jensen (1986) suggests that firms’ free cash flow is a source of agency costs to the firm, where the manager is not an owner. As such, the manager engages in activities (perquisite consumption) that consume cash flow to satisfy his personal interest, to the detriment of the firm’s interest. However, as the manager begins to acquire ownership, his interest begins to be aligned with that of the firm. Instead of spending free cash to the detriment of the firm, he invests in positive net present value projects, which further enhance the accumulation of free cash flow. This, therefore, suggests a positive relationship between managerial ownership and agency cost.
On the other hand, Stulz (1988) and Morck et al. (1988) argued that large managerial ownership tends to aggravate agency conflicts instead of neutralizing them. When a manager has attained a significant portion of ownership, he takes full control of all decisions, including decisions on how free cash flow should be utilized. He follows his own objective and does so without the fear of discipline (Guizani, 2018). As such, entrenchment is viewed as the extent to which firm managers “fail to experience discipline from the full range of corporate governance and control mechanisms” (Berger et al., 1997, as cited in Guizani, 2018). A study by Elyasiani and Zhang (2015) documented those managers that are entrenched prefer to hold free cash because it is easier to transform the cash into private benefits for the managers. A similar conclusion was forwarded in Opler et al. (1999). If managers hold cash so as to transfer these cash to private benefits, it is cogent therefore to assume that free cash flow should be negatively related to managerial ownership after a certain level of ownership.
2.2. Managerial ownership free cash flow and agency costs
As forwarded earlier, free cash flow could be a source of agency costs if the manager misuses it. It could also serve as a source of increase in the value of the firm through efficient utilization of it to generate more assets. Generally, studies, such as Yero and Hamman (2014), Iskandar et al. (2012), found that free cash flow negatively affects assets’ utilization thereby positively affecting agency cost. Wang (2010) revealed that free cash flow is capable of incurring agency costs due to perquisite consumption and shirking behavior.
Other studies documented the effect of free cash flow on various proxies, implying that free cash flow is a source of agency cost. For instance, Gul and Tsui (1998) and also Griffin et al. (2010) found that free cash flow is related to high audit fees. Similarly, Guizani (2018) forwarded that free cash flow is associated with a lower dividend payout.
The moderating effect of free cash flow on agency costs has also been investigated by Iskandar et al. (2012). However, Iskandar et al. (2010) only investigated the overall moderating role of managerial ownership on the relationship between free cash flow and agency cost. They ignore the fact that the relationship between managerial ownership and free cash flow could be a two- or even three-stage relation (nonlinear). As narrated earlier, firm managers with ownership stake that is capable of entrenching them tend to squander free cash flow at will, without any fear. At the alignment stage, on the other hand, the managers put in their best to efficiently utilize the resources, which in turn garners more free cash.
Similarly, the relationship between managerial ownership and agency costs was documented to be nonlinear. A study by Jelinek & Stuerke (2009) investigated the effect of managerial ownership on performance and asset utilization among other things. Their findings revealed that managerial ownership is indeed nonlinearly related to agency cost. As such, applying managerial ownership in a linear fashion to moderate the relationship between free cash flow and agency costs might only give a partial picture of the effect, depending on which side of the nonlinearity is more concentrated in the data distribution.
Based on the discussion above, the study formulated the following hypotheses:
H01: | Managerial ownership does not have a significant nonlinear effect on free cash flow. | ||||
H02: | Free cash flow does not have a significant negative effect on agency cost. | ||||
H03: | Managerial ownership does not have a significant nonlinear effect on the effect of free cash flow on agency cost. |
3. Methodology
This section presented the methodological design of the study. In this study, a correlational research design was adopted, as it examines the extent to which certain independent variables (as mentioned in the hypotheses) affect another (dependent) variable.
3.1. Population and sample
The population of the study comprised of firms listed under two sectors of the Nigerian stock exchange (NSE), as industrial and consumer goods (a total of 32 firms). Out of the 32 firms listed under this sector, we sampled a total of 26 firms (about 81.3%). This sample was arrived at after applying a filter that includes only those firms that were listed on the NSE prior to 2009 (which is the commencement period for the study) and are still listed as at the end of the financial year 2015 (which is the terminal period for the study). This filtering process led the study to arrive at 26 firms, having filtered out firms such as Notore Chemicals Plc (listed in August 2018), Dangote Cement Plc (listed in October 2010), Multi-Trex Integrated Foods Plc (listed in November 2010), Portland Paints Plc (listed in July 2009), McNichols Foods Nigeria Plc (listed in October 2009), and Nigerian Poly Product Plc (delisted in 2014). We believe that the sample avails the study of a suitable context to investigate issues relating to agency problems associated with free cash flow.
The study covers a period of seven years (2009–2015). This span gives the study the maximum number of firms with available data for the study. The sector includes large Multinational Corporations (necessitating agency relationships) with relatively large cash flows to deal with. Data for these sampled firms were obtained from the annual reports of the firms.
Variable | Proxy/Measure | Support from Literature |
---|---|---|
Agency Cost (Ac) | Sales revenueTotal assets | Wang (2010), Yero and Hamman (2014) |
Free Cash Flow (Free_cf) | Operating cash flow−Tax−Interest Exp−Total dividendsSales | Wang (2010) |
Managerial Ownership (Mown) | Number of ordinary shares held by Executive DirectorsTotal issued ordinary shares×100 | Hilt (2008) |
Performance (ROA) | Earnings before interest and taxTotal assets | Yero and Shehu (2015) |
Leverage (Lev) | DebtDebt+Equity | Welch (2011), Yero and Hamman (2014) |
Interacting term (mown<25%, mown>=25%) | Mown<25%=1 if managerial ownership is less than 25%, 0 otherwise. | Morck et al. (1988) |
Mown>=25%=1 if managerial ownership equals to or greater than 25%, 0 otherwise |
3.2. Techniques of analyses
Based on the design and the nature of the data, the study employed panel data analysis to investigate the nonlinear effect of managerial ownership on the effect of free cash flow on agency cost. In that, panel regression was estimated for firms’ year’s observations using the following equations:
3.2.1. Nonlinear effect of managerial ownership on free cash flow
3.2.2. Effect of managerial ownership and free cash flow on agency costs
3.2.3. Nonlinear effect of managerial ownership on the effect of free cash flow on agency costs
Ac | = | Agency cost (asset utilization as a proxy) |
FREE-cf | = | Free cash flow |
Mown | = | Managerial ownership |
fcf_mown<25% | = | Interaction of free cash flow with an indicator variable of managerial ownership less than 25% |
fcf_mown>=25% | = | Interaction of free cash flow with an indicator variable of managerial ownership greater than 25% |
ROA | = | Returns on assets (as a control variable) |
Lev | = | Financial leverage (as a control variable) |
β = Regression Parameter, μ = Regression error term and “it” = firm “i” at time “t”.
4. Data Analyses
This section presents the results of the data collected and analyzed.
Table 2 presents the result of descriptive statistics of the variables used in the study. From the table, it can be observed that the average asset utilization for firms under study over the period covered is 1.1741. This means, that on average, the firms generated revenue of one Naira seventeen point forty-one kobo (NGN 1.1741) for every one Naira of assets invested. This shows that on the whole, the assets of these firms are indeed productive on average. However, for some firms, no single amount was generated as revenue in at least one of the firms’ years’ observations (minimum AC = 0). Contrastingly, however, at least one firm generated as high as NGN8.5295 revenues per NGN1 invested in assets.
Variables | Mean | Standard Dev. | Minimum | Maximum |
---|---|---|---|---|
AC | 1.1741 | 0.8124 | 0 | 8.5295 |
Free_cf | 0.0648 | 0.1852 | −0.5908 | 0.7703 |
Mown | 11.548 | 21.019 | 0 | 77.4805 |
ROA | 0.0965 | 0.1516 | −0.5184 | 0.7927 |
Lev | 0.1488 | 0.1925 | 0 | 0.8323 |
The statistics also reveal that the study firms generated a positive free cash flow on average, over the study period. This amounted to about 6.48% of the total sales figures. This, however, goes to as low as −59.08% of the total sales for at least one firm and to as high as 77.03% of the total sales. This goes on to indicate that for certain years, some firms were doing extremely poor, while others were doing extremely well, in terms of free cash flow generation.
The average equity holdings by managers of firms under study amount to about approximately 11.55% stakes. Though there is at least one year in a firm whereby executive directors owned no singly shareholding (minimum = 0). For some firms, however, the managerial shareholding reveals a staggering figure of up to as high as 77.48%. This means that while some firms have managers with no iota of the stake at the helm of the firms’ affairs, some have managers with controlling interests, thereby enabling them to wield and exert a strong influence on how to handle the firms’ free cash flow. Both of the two cases are not healthy for the firms’ wellbeing. Looking at the average nevertheless, managers hold healthy levels of equity stakes in firms they manage.
The average performance of the firms stands at 9.65 earnings before interest and tax as a percentage of total assets. Here also, while some firms were doing poorly in terms of profitability (minimum =−0.5184), some firms’ years were extremely profitable (79.27% of total assets profit). The average financial leverage for the firms stands at 14.88% of the total equity (debt + ordinary equity). On average, therefore, we can say that the firms are not highly levered. Some firms however are highly levered up to the tune of 83.23% of the total equity. This indicates serious risk and at the same time rigorous monitoring by the debt holders for some of the firms. At least one firm year observation, however, is free from the lenders’ scrutiny (minimum = 0).
Among the respective standard deviation figures for the variables, Mown seems to stand out. It shows that the noise/disparity in the distribution of the data (deviation from the mean) is on the high side. The true mean therefore may be far from the reported mean.
5. Regression Results
Table 3 below depicts the result of testing the nonlinear effect of managerial ownership on free cash flow. As indicated in the methodology, the study partitioned managerial ownership into two segments, based on the outcome of the two-way scatter plot extracted for free cash flow and managerial ownership (see Fig. 1 for the plot). The visual analysis of the plot indicates a kind of “U” shaped relationship between the two variables. It shows that free cash flow increases as managerial ownership rises, up to a certain point. Then, it descends as managerial ownership continues to increase. This indicates a two-dimensional relationship that depends on the level of managerial ownership, hence the two partitions.
Variable | Model one (Mown<25%) | Model two (Mown>=25%) |
---|---|---|
Coefficient (z-score) sig | Coefficient (t-value) sig | |
Mown | 0.00363 (2.01)* | −0.03885 (2.33)* |
R-Squares | 0.038 | 0.168 |
The turning point as identified in the diagram (from upward trend-positive relationship to downward trend-negative relationship) is identified by the study from the visual analysis and from data trials to be at around 25% level of managerial ownership. As such, the relationship was partitioned to be between free cash flow and managerial ownership where managerial ownership is less than 25% and where managerial ownership is greater than or equal to 25%. The two relationships were estimated using panel regression and the results of which are presented in Table 3. Following the table is the interpretation of the results.
As presented in Table 3, the effect of managerial ownership at less than 25% (Mown<25%) and at greater than or equal to 25% (Mown>=25%) on free cash flow is depicted. The results were obtained after following the steps required for panel regression analysis. For Mown<25%, the result depicted is a random effect result as the Hausman specification test indicated that the difference in coefficients is not systematic and is not fixed in an entity (see Fig. 1).
The coefficient of firms’ years’ managerial ownership less than 25% (Mown<25%) is positive and significant at 5%. It indicates that a 1% increase in managerial equity holdings leads to an increase in free cash flow by 0.00353. This trend is true for all firms’ years’ in which managerial ownership does not exceed 25%. In a nutshell, the result indicates that managerial ownership has a significant positive effect on free cash flow, for firms’ years’ observation of managerial ownership less than 25%.
Table 3 also presents the result for the effect of managerial ownership at ownership greater than or equal to 25% (Mown>=25%). Again, panel regression analysis was carried out to arrive at the result. The outcome of the analysis led us to settle on the pooled OLS with robust standard error. This was as a result of the fact that the test between the fixed and random effect favored the random effect model. From there, the panel effect test carried out revealed that there’s no panel effect, and as such, the best way to model the relationship is pooled OLS. After estimating the pooled OLS, the heteroskedasticity test revealed that the error term has no constant variance. As such, we re-estimated the pooled OLS while adding robust options (full results of these analyses are appended).
From the result, it is evident that for firms’ years’ observations of managerial equity holdings that are above or equal to 25% of total holding, managerial ownership wields a significant negative effect on free cash flow. The result indicates that, from the 25% equity holding of managers upwards, a percentage change in this holding brings about a decrease in free cash flow by about 0.03885 units.
The above findings, therefore, confirm our expectations that managerial ownership has a nonlinear effect on free cash flow. The evidence presented above, therefore, suffice for the study to reject the null hypothesis H01 and conclude that managerial ownership has a significant nonlinear effect on free cash flow.
Based on this finding, the alignment strategy using the ownership will only be effective only up to a certain extent. This was documented empirically in the results presented in Table 4.
Model One | Model Two | Model Three | |
---|---|---|---|
(without moderation) | (Mown<25%) | (Mown>=25%) | |
Coefficient | Coefficient | Coefficient | |
Variable | (z-score)sig | (z-score)sig | (z-score)sig |
Free_cf | −0.5367 | −0.3976 | 0.0825 |
(−4.21)*** | (−2.89)*** | (0.67) | |
Mown | 0.1156 | 0.0147 | 0.0132 |
(4.07)*** | (5.42)*** | (6.40)*** | |
Fcf_mown | — | 0.5221 | −0.8881 |
(4.79)*** | (−5.13)*** | ||
ROA | 1.3311 | 1.8339 | 1.2815 |
(2.94)*** | (4.39)*** | (2.92)*** | |
Lev | 0.4565 | 0.5978 | 0.5771 |
(1.10) | (1.47) | (1.42) | |
R_square | 0.2982 | 0.3523 | 0.3415 |
Wald Chi-square/sig. | 68.28*** | 75.72*** | 79.43*** |
Table 4 above presents the results of panel regression analyses conducted on both the linear (model one) and nonlinear effects (models two and three) of managerial ownership on the effect of free cash flow on agency cost. Prior to estimating the panel regression, pooled OLS was applied to test the effect of managerial ownership and free cash flow on agency cost. The model was re-estimated while adding performance (ROA) as a control variable, and then financial leverage was added in the next hierarchy. In all the three steps, managerial ownership and free cash flow have been consistently and significantly positive and negative, respectively. The two control variables also were positive and significant. However, when robust OLS was estimated (to remedy the inherent heteroskedasticity identified), leverage, though positive, was not significant (full results may be requested from the authors).
From there, the model (with the two control variables) was adopted for panel regression analyses without moderation at first (model one). Then, with moderation by the addition of variables, which measure the interaction of free cash flow and managerial ownership, the managerial ownership was less than 25% (fcf_mown<25% — model two). The same analysis was repeated using additional variables measuring the interaction of free cash flow and managerial ownership where managerial ownership is greater than or equal to 25% (fcf_mown>=25% — model three). The outcome of the analyses leads us to finalize the random effect results for both models. These results are presented side by side in Table 4 above.
Looking at model one from Table 4 above, the coefficient of free cash flow is negative and significant. This indicates that free cash flow has a significant negative effect on asset utilization and hence a positive effect on agency cost. In the same model, the coefficient of managerial ownership (mown) is positive and significant. This means that managerial ownership reduces the agency cost since it positively affects asset utilization.
Looking at models two and three, the results indicated that the coefficients of free cash flow are negative and significant in model one but positive and insignificant in model two. The coefficients of managerial ownership have been consistently positive and significant. Just as in model one, mown is positive and significant in both models two and three.
Notwithstanding the differences observed above as regards to the coefficients of free cash flow, the significant negative effect reflected in model one suffice to conclude that free cash flow has a significant negative effect on asset utilization and thus a significant positive effect on agency cost. This is so because free cash flow became insignificant only when the moderator (mown>=25%) was introduced in model three. This addition subsumed the negative effect from free cash flow (FREE_cf) into the moderated free cash flow variable (fcf_mown>=25%). This was expected as explained in Baron and Kenny (1986) and the subsequent modified explanation by Hsu et al. (2012). Thus, the influence of independent variables may become insignificant in the presence of a moderator or mediator variable. This therefore suffices to conclude that free cash flow has a significant negative effect on asset utilization and hence a positive effect on agency cost. With this, hypothesis, H02 is to be rejected.
Looking at the coefficient of the interaction of free cash flow and managerial ownership Table 4 again, it can be observed that the coefficient is significant in both models two and three. However, in model two (mown<25%), the coefficient shows a significant positive effect on asset utilization and hence negatively affects agency cost. On the other hand, the coefficient of interaction between free cash flow and managerial ownership for firms’ years’ observations having managerial ownership greater than or equal to 25% (fcf_mown>=25%) displays a negative sign. This suggests a negative effect of free cash flow (for a firm’s year having managerial ownership that is equal to or above 25%) on asset utilization and hence there is a positive effect on the agency cost.
Given the evidence above, the study therefore rejects hypothesis H03 and concludes that managerial ownership has a significant nonlinear effect on the effect of free cash flow on agency cost.
Among the two control variables, though both display positive effects on asset utilization (negative effect on agency cost) in all the three models, only ROA performance is significant. Overall, the variables explain about 29.82%, 35.23%, and 34.15% variations in agency costs as represented by asset utilization, respectively, in models one, two, and three. The p-values of the respective chi-square values in the three models indicate that the variables jointly and significantly explained the variation in the dependent variable (agency cost), at the 1% level of significance in all cases.
5.1. Discussion of the findings
The findings confirmed that managers as agents misuse firms’ resources for their personal gains. Their personal interest can hence be gradually synchronized with that of the firm by having more stakes in the firms they manage through equity holdings. Managerial ownership therefore serves as an incentive alignment mechanism. It gives the managers the needed incentive to better manage the firms’ resources and produce more cash flow. This is clearly depicted by the result in Table 4 (for Mown<25%).
However, as argued in the literature, the effectiveness of using management ownership in curbing agency issues such as the one that is associated with free cash flow is limited only to a certain extent. This was extensively documented in the literature (such as Morck et al., 1988; Jelinek and Stuerke, 2009; and others). As the manager gets stronger through increased ownership, he reaches a certain level of strength, which enables him to control more and more of the decision outcomes of the corporations he manages the entrenchment hypothesis. At this point, the conflict is between the large shareholders and the minority holders, in which the managers with large stakes now have the ability to transfer wealth to themselves other than dividends and sort. He is thus likely to engage in unnecessary perquisite consumptions that are directly beneficial only to him. He also tries to maintain control of the cash, as one of his tools for building an “empire”.
As rightly pointed out in Yero and Shehu (2015), in pursuant to empire building, the manager invests even in suboptimal projects in his bid to expand the firm. These, therefore, point towards a negative effect of managerial ownership on free cash flow at a higher level of ownership. Our results (where Mown>=25%) pointed to this fact.
It is therefore rational to assume that if managerial ownership is to serve as a moderator on the effect of free cash flow on agency cost, then, its nonlinear effect on free cash flow should be factored in. True to the expectation, the results of models two and three confirmed this logic.
Also, managerial ownership displays an overall significant positive effect on asset utilization and hence a significant negative effect on agency cost. The overall positive/negative significance of managerial ownership on asset utilization/agency costs may not be unconnected to the overall dominance of managerial ownership levels in firms within the range of less than 25%. This can be observable from the average managerial ownership value of 11.55% as reported in the descriptive statistics.
Financial leverage as the monitoring mechanism tends to push managers to remain on their toes, thereby positively affecting the efficient utilization of a firm’s assets (Jensen and Meckling, 1976; Bello and Yero, 2011). Thus, a positive effect was expected. With respect to ROA, it is only logical for performance to positively relate to the efficiency with which assets are utilized. Considering the measurements of the two (i.e., performance and asset utilization) as used in this study, the ROA coefficients of 1.2815 indicate that a unit change in performance as a percentage of total assets is associated with an increase in efficiency with which the assets are utilized by 1.2815% (for model one). 1% increase in ROA brings about a 1.1946% increase in asset efficiency (for model two). This is cogent as a closer look at the two, it can be deduced that performance is a better leverage for asset efficiency in the model where managerial ownership aligns the interest of the manager to apply free cash flow efficiently (positively impacting on asset efficiency).
6. Conclusion
This study investigated the nonlinear effect of managerial ownership on the effect of free cash flow on agency cost. The study estimated both pooled OLS and panel regression while controlling for fixed and random effects. The analyses were carried out with and without moderating the free cash flow variable. The outcome of the analyses leads the study to conclude that free cash flow serves as a source of agency costs by negatively affecting asset utilization. The study also concludes that managerial ownership levels have different dimensional effects on free cash flow, and this therefore affects the nature of the relationship between free cash flow and agency costs in a nonlinear fashion.
This study is not without limitations. Measuring agency costs for research purposes can only be achieved through proxies. Each of these known proxies may have a different implication on the firm as a nexus of relationships. As pointed out in Yero and Shehu (2015), ample generation of sales may not be translated into an increase in returns for shareholders and might not have been a result of the choice of the most profitable investments from the available ones. It could merely be due to shortage in supply by competitors or population explosion, just as the case of reduced sales due to economic recession, changes in taste or fashion, or population implosion resulting from migration, war, and other life claiming disasters. Thus, we acknowledge the fact that our proxy of the agency cost may lack the desired precision in measuring the agency cost of a firm in its entirety. For this reason, subsequent studies should therefore consider adopting other proxies of the agency cost.