Financial Decisions and Ownership Structure as Control Mechanisms of Agency Problems: Evidence from Italy
Corporate Governance: The International Journal of Business in Society, Forthcoming
Posted: 27 Feb 2018
Date Written: February 16, 2018
Purpose – The aim of this study is to investigate the relationship between financial decisions and ownership structure using the control contests on a sample of Italian listed companies.
Design/methodology/approach – The analysis adopts a balanced panel data-set of 984 firm-year observations for the period 2002-2013, with estimation using a Generalized Method of Moments (GMM).
Findings – The results appear to confirm both the hypothesis of the alignment of interests and the entrenchment effect. The entrenchment and alignment effects are not found to be alternatives but rather are found to co-exist. The presence of a coalition of minority shareholders acts as a tool to control agency costs, particularly when the coalition is instrumental in the contestability of corporate control.
Originality/value – This study shows that there is considerable value to the firm when individual blockholders come together in a contestable environment and become instrumental in making business decisions. The results support the contention that contestability is an excellent deterrent to dampen the expropriation of benefits to minority shareholders. This study also provides evidence that cash holding can be a good substitute for dividends and debt in the effort to limit agency costs.
Practical Implications – These findings suggest that minority shareholders may have a larger impact than previously identified by strategically aligning with other shareholders to form coalitions. This study provides several practical implications. First, dividend payout is not necessarily a good instrument to control and monitor agency costs. This is because the payout can be used to expropriate benefits from the minority shareholders. Second, high ownership concentration does not always reduce agency costs. Third, a non-collusive coalition can be more useful in the monitoring of agency costs than other tools, such as the debt level.
Keywords: Debt; Ownership structure; Payout dividend; Cash holding; Contestability contests; Italian listed companies; Panel data; GMM
JEL Classification: G32; G34; G35
Suggested Citation: Suggested Citation