The Impact of Managerial Entrenchment on Agency Costs: An Empirical Investigation Using UK Panel Data

32 Pages Posted: 27 May 2009

See all articles by Chris Florackis

Chris Florackis

University of Liverpool (UK)

Aydin Ozkan

Hull University Business School (HUBS)

Abstract

This paper empirically investigates the relationship between managerial entrenchment and agency costs for a large sample of UK firms over the period 1999-2005. To measure managerial entrenchment, we use detailed information on ownership and board structures and managerial compensation. We develop a managerial entrenchment index, which captures the extent to which managers have the ability and incentives to expropriate wealth from shareholders. Our findings, which are based on a dynamic panel data analysis, show that there is a strong negative relationship between managerial entrenchment and our inverse proxy for agency costs, namely asset turnover ratio. There is also evidence that short-term debt and dividend payments work as effective corporate governance devices for UK firms. Finally, our findings reveal that agency costs are persistent over time. The results are robust to a number of alternative specifications, including varying measures of managerial entrenchment and agency costs.

Suggested Citation

Florackis, Chris and Ozkan, Aydin, The Impact of Managerial Entrenchment on Agency Costs: An Empirical Investigation Using UK Panel Data. European Financial Management, Vol. 15, Issue 3, pp. 497-528, June 2009. Available at SSRN: https://ssrn.com/abstract=1410316 or http://dx.doi.org/10.1111/j.1468-036X.2007.00418.x

Chris Florackis

University of Liverpool (UK) ( email )

The Management School
University of Liverpool
Liverpool, L 697ZH
United Kingdom

Aydin Ozkan

Hull University Business School (HUBS) ( email )

Hull, HU6 7RX
United Kingdom

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