Female directors, mechanisms for corporate governance and agency cost

Farissha Alluwi

Abstract

This paper aims to investigate the effect of the presence of female board directors and corporate governance mechanisms on agency cost focusing on board of directors’ and audit committee’s characteristics. The samples used in this study consisted of 150 companies listed on Bursa Malaysia in trade and services sector from 2010 until 2013. The dependent variable in this research is agency cost. Based on the extensive literature review, this study applied two agency cost proxies, which are asset utilisation ratio (AUR) and expense ratio (ER). Meanwhile, there are seven independent variable which are female board directors, board size, CEO duality, independent directors, size of the audit committee, audit committee meeting and audit quality. Data was analysed using descriptive statistics, correlation analysis and linear regression. The empirical result reveals that female board directors, board size, CEO duality, independent directors, and audit quality have a significantly negative relationship with agency cost using asset utilisation ratio (AUR) as the proxy. Meanwhile, for expense ratio (ER) proxy, the result shows that female board directors, the size of the audit committee, and audit quality have a significantly negative relationship with agency cost. Besides that, with these research findings, the corporate companies could have a better and thorough understanding about corporate governance which would help them decrease their agency cost from time to time. The findings also could be used as the reference and guidance in establishing company policies or finance policies in decreasing the company’s agency cost. Plus, these findings enrich the literature in corporate companies, thus help future researchers. Finally, the researcher presented some suggestions and recommendations for future studies to diversify the sectors of the selected companies so that the data obtained will be wider and larger. Besides, future researchers may extend the data period from four years up to 10 years.

References

1. Adams, R. and Ferreira, D. (2009), “Female in the boardroom and their impact on governance and performance”, Journal of Financial Economics, Vol. 94, pp. 291-309 2. Al-Mamun, A., Yasser, Q., Rahman, M., Wickramasinghe, A. and Nathan, T. (2014). Relationship between audit committee characteristics, external auditors and economic value added (EVA) of public listed firms in Malaysia. Corporate Ownership and Control, 12 (1, Continued - 9), 899-910. 3. Al-Mahamid, S. and Al-Sa'eed, M., A. (2010). The relationship between perceived usefulness, perceived ease of use, perceived information quality, and intention to use E-government. Journal of Theoretical and Applied Information Technology. 11. 30-44. 4. Ang, J., S.Rebel, A.Cole, & Lin, J. W. (2000). Agency Costs and Ownership Structure. The Journal of Finance, LV(1), 81-106. 5. Anderson, R.C. and Reeb, D.M. (2004), “Board composition: balancing family influence in S&P 500 firms”, Administrative Science Quarterly, Vol. 49, pp. 209‐37. 6. Beiner, S., Drobetz, W., Schmid, F. & Zimmermann, H. (2004). An integrated framework of corporate governance and firm valuation: Evidence from Switzerland. ECGI Paper 34/2004. 7. Bedard, J., Chtourou, S. and Courteau, L. (2004). The effect of audit committee expertise, independence, and activity on aggressive earnings management, Auditing: A Journal of Practice & Theory, 23(2), 13–35. 8. Belkhir, M. (2004) Board Structure, Ownership Structure, and Firm Performance: Evidence from Banking. Applied Financial Economics, Vol 19, No. 19, pp. 1581-1593. 9. Brickley, J.A., Coles, J.L. & Terry, R.L. (1994). ‘Outside directors and the adoption of poison pills’, Journal of Financial Economics, 34: 371-390. 10. Carter, D. A., B. J. Simkins, dan W. G. Simpson. (2003). Corporate governance, board diversity, and firm value. The Financial Review 38 (1): 33–53. 11. Ebrahim, M. A., Abdullah K. A., Faudziah, H. (2014). “The Measurements of Firm Performance’s Dimensions”. Asian Journal of Finance & Accounting, Vol. 6 No. 1, pp. 24-49 12. Eisenberg, T., Sundgren, S. & Wells, M. (1998). ‘Larger board size and decreasing firm value in small firms’, Journal of Financial Economics, 48: 35-54. 13. Fama, E. F., & Jensen, M. C. (1983). Separation of ownership and control. Journal of Law and Economics, 26, 327–349. 14. Florackis, C. & Ozkan A. (2004). Agency Costs And Corporate Governance Mechanisms: Evidence For UK Firms. Working Paper, University of York, UK. 15. Heath, J. (2009). The uses & abuses of agency theory. Business Ethics Quarterly, 4, 497-528. 16. Ibrahim, H., dan Samad, F. A. (2011). Agency costs, corporate governance mechanisms and performance of public listed family firms in Malaysia. Journal of Business Management, Vol. 42, No. 3, pp. 17-25. 17. Inten Meutia, and Radziah Abd Latiff, and Romlah Jaffar. (2004). Kebebasan juru audit sebagai pemoderat dalam hubungan antara kualiti audit dengan pengurusan perolehan. Jurnal Pengurusan, 23 . pp. 73-95 18. Jensen, M., & Meckling, W. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. 19. Jonas, M. (2015). Oppose, Support, or Hedge? Distributional Effects, Regulatory Pressure, and Business Strategy in Environmental Politics. Global Environmental Politics,15(2): 19-37. 20. Jurkus, A. F., Park, J. C., & Woodard, L. S. (2008). Gender diversity, firm performance, and environment. Working Paper. Obtained on 1 Mac 2015 from http://ssrn.com/abstract=1085109. 21. Larkin, M. B., Bernardi, R. A. dan Bosco, S. M. (2013), Does female representation on Boards of Direcors associate with increased transparency and ethical behavior?”, Accounting and the Public Interest, Vol. 13, pp. 132-150. 22. Lynall, M. D., Golden, B. R., & Hillman, A. J. (2003). Board composition from adolescence to maturity: A multitheoretic view. Academy of Management Review, 28(3), 416-431. 23. Myers, S.C (1984), “The Capital Structure Puzzle”, Journal of Finance, Vol. 39, pp. 575-92. 24. Nirosha H. W., & Stuart L. (2013). Female on Board, Firm Financial Performance and Agency Costs. Asian Journal of Business Ethics, Volume 2, Issue 2, pp. 113–127. 25. Pfeffer, J. dan Salancik, G. R. (1978). The External Control of Organizations: A Resource 26. Dependence Perspective, Harper & Row, New York. 27. Porter, R., Samovar, L., McDaniel, E. (2007). Communication Between Cultures. Cengage Learning, Di peroleh pada 3 November 2017, daripada https://books.google.com.my/books?id=dQfuf05kheYC 28. Singh, M., & Davidson, W. N. (2003). Agency costs, ownership structure and corporate governance mechanisms. Journal of Banking and Finance, 27, 793–816. 29. Shleifer, A. and Vishny, R. W. (1986). A survey of corporate governance. Journal of Finance, 52, 737-783. 30. Terjesen, S., & Singh, V. (2009). Female presence on corporate boards: A multi-country study of environmental context. Journal of Business Ethics, 83(1), 55-63 31. Thiruvadi, S., & Huang, H.-W. (2011). Audit committee gender differences and earnings management. Gender in Management: An International Journal, 26(7), 483–498. 32. Tricker, B. (2000). Editorial-corporate governance-the subject whose time has come. Corporate Governance, 4, 289-296.