THE IMPACT OF AGENCY COSTS ON FIRM PERFORMANCE: AN ANALYSIS ON BIST SME FIRMS

Abstract

Purpose- The basis of the modern firm structure consists of the mutual contractual relationship of the principle and agent. Accordingly, the separation of ownership and management may lead conflicts and costs to bear. Conflict of interest between managers and shareholders creates a threat to the firm’s financial performance. In order to evaluate this aspect of the issue, this study examines the relationship between agency costs and the firm performance of the SME firms traded in Istanbul Stock Exchange between 2017 and 2020. Asset utilization ratio, operating expenses ratio and the ratio of free cash flows to total assets are used to measure agency costs. Methodology- The research data are formed by small and medium sized publicly traded firms in BIST KOBI which is extracted from Bloomberg database and KAP. 42 manufacturing companies were examined to be used in the research, and 38 companies found eligible for the analysis. Panel data analysis with 3 different regression models, which enables to control of heterogeneity effect, is conducted by using Stata 11 software package. Findings- According to fixed effect panel data regression based on three models, only one proxy for agency cost measurement which is operating expense, is found significant for small and medium sized companies traded in Istanbul Stock Exchange Market. Other proxies (asset utilization ratio and ratio of free cash flow to total assets) are found invalid for agency cost measurement. Conclusion- This study tries to examine the discussion of agency cost measurement based on the previous literature. The empirical part of the study presents panel data analysis on a dataset of 38 public SME firms traded in Borsa Istanbul between 2017 and 2020. Three different models are constructed to measure the agency cost in the light of related literature. Only one proxy is found as direct measure of agency cost while others are insignificant.

Keywords

• Agency costs
• financial performance
• Istanbul Stock Exchange
• SME firms
• panel data analysis

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