Firm Size, Corporate Debt, R&D Activity, and Agency Costs: Exploring Dynamic and Non-Linear Effects

53 Pages Posted: 14 Apr 2019

See all articles by Giorgio Canarella

Giorgio Canarella

University of Nevada, Las Vegas

Stephen M. Miller

University of Nevada, Las Vegas - Department of Economics; University of Connecticut - Department of Economics

Date Written: March 18, 2019

Abstract

This paper empirically investigates firm-specific determinants of agency costs, a relatively new and unexplored area in corporate finance. We estimate dynamic agency costs models, linking debt, firm size, and R&D activity to agency costs for a panel of U.S. information and communication technology (ICT) firms over 1990-2013. We adopt the Blundell and Bond (1998) two-step system GMM technique, which explicitly accounts for persistence, endogeneity, and unobservable firm heterogeneity. We provide the first evidence that our inverse proxy for agency costs, namely asset turnover (Ang, et al., 2000), exhibits an inverted U-shaped relationship with debt and a U-shaped relationship with firm size and R&D activity. These findings imply that agency costs experience a minimum value (in case of debt) and a maximum value (in case of firm size and R&D activity) and, therefore, that agency costs are higher at both low and high levels of debt, and lower at both low and high levels of firm size and R&D activity. We find that the level of debt of the average firm in the sample falls below the level that minimizes agency costs. We also document that, consistent with the agency literature, short-term debt provides an additional effective monitoring mechanism to alleviate agency costs. Our findings reveal that agency costs are dynamic in nature, mean-reverting, and persistent over time. This notion confirms the Florackis and Ozkan (2009) conjecture that managers behave as though an optimal level of agency costs exist that they pursue. Finally, we find a positive association between firm profitability and agency costs and a negative association between agency costs and firm growth. Extensive additional analysis confirms the robustness of our results.

Keywords: ICT industry; agency costs; non-linearity; dynamic adjustment; system GMM

JEL Classification: G21; G28; G32; G34

Suggested Citation

Canarella, Giorgio and Miller, Stephen M., Firm Size, Corporate Debt, R&D Activity, and Agency Costs: Exploring Dynamic and Non-Linear Effects (March 18, 2019). Available at SSRN: https://ssrn.com/abstract=3354973 or http://dx.doi.org/10.2139/ssrn.3354973

Giorgio Canarella

University of Nevada, Las Vegas ( email )

4505 S. Maryland Parkway
Box 456005
Las Vegas, NV 89154-6005
United States

Stephen M. Miller (Contact Author)

University of Nevada, Las Vegas - Department of Economics ( email )

4505 S. Maryland Parkway
Box 456005
Las Vegas, NV 89154
United States
702-895-3776 (Phone)
702-895-1354 (Fax)

HOME PAGE: http://faculty.unlv.edu/smiller/

University of Connecticut - Department of Economics

365 Fairfield Way, U-1063
Storrs, CT 06269-1063
United States

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