The role of agency costs in explaining financial performance differences: An empirical analysis on selected public firms in bric countries
GÜRBÜZ, A. Osman
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The consequences of the recent corporate scandals have directed the attention of corporations towards the opportunistic behaviors of managers; thus, evaluation of agency costs encountered within the firm. The divergence of interest between the managers and shareholders has a potential to con- stitute a threat to the firms’ financial performance. Due to the rising importance of the topic for both academic literature and practical grounds, this study attempts to evaluate the link between agency costs of equity and financial performance of selected public firms operating in BRIC countries be- tween the years 2003 and 2014, inclusive. Three measures have been utilized to proxy for agency costs of equity; namely, asset utilization ratio, operating expense ratio, and the ratio of free cash flows to total assets. An additional interaction variable is also generated to take into account the existence of investment opportunities when free cash flows are abundant. The findings based on panel data analysis are considered to provide useful insight upon an additional explanation to the presence of financial performance differences among the firms other than simply firm-specific attributes and emphasize the importance of finding mechanisms for alleviating agency costs to attain the overall goal of share- holder wealth maximization.