Minority Investor Protection Mechanisms and Agency Costs: An Empirical Study Using the World Bank-Developed Approach

Abstract

This study examines the impacts of minority investor protection mechanisms on agency costs in Vietnam. All relevant indicators of minority investor protection developed by the World Bank are employed with a panel data sample of 135 Vietnamese listed firms during the period from 2014-2018. It is found that the following mechanisms are effective in mitigating agency costs and hence agency problems at the firm level: i) extent of disclosure; ii) extent of director liability; iii) ease of shareholder suit; iv) shareholders’ rights in major corporate decisions; and v) corporate transparency. Interestingly, it is found that the board independence and controlling government shareholder do not play significant roles in addressing agency problems. To the best of the authors’ knowledge, this is one of the first attempts at testing for the impact of minority investor protection mechanisms developed by the World Bank on agency costs at the firm level. This study also provides policy implications for selecting effective mechanisms to mitigate agency conflicts between controlling shareholders and minority investors in order to promote the financial performance of the firm in an Asian emerging market.

Keywords: Minority investors, Controlling shareholders, Agency costs, Corporate governance mechanisms

JEL Classification: D22, G34, G41