CONSIDERACIONES AMBIENTALES

In this study, the researcher aims at investigating the impact of a comprehensive set of corporate governance mechanisms on agency costs; then investigate the impact of these mechanisms during two different economic circumstances to find which of these mechanisms help in reducing the agency costs during the steady economic conditions (pre–crisis period) and during a period that follows an abnormal event like the 2008 financial crisis (post crisis recession period).

Based on the review of theoretical arguments around each mechanism and the mixed results of the empirical literature, as mentioned in the previous chapters, the researcher has developed the following hypotheses:

H1: There is a negative association between board size and agency costs.

Board size (BRD) is measured as the number of board members served in the board during the fiscal year. The number of board members was manually collected from firms’ annual reports. Same measure was employed by many studies, e.g., Henry (2010); Ibrahim and Samad (2011); Andreou, Louca and Panayides (2014); Belghitar and Clark (2014) and Yang and Zhao (2014).

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H2: There is a negative association between the percentage of independent board

members and agency costs.

Board composition (IND) is measured as the number of the independent board members as defined by the UK corporate governance code divided by board size; same measure was utilised by Henry (2010) and Ibrahim and Samad (2011), among others.

H3: There is a positive association between duality and agency costs.

Duality (DUL) is measured by generating a dummy variable that takes the value of 0 if there is a separation between the CEO and chairman posts 1 otherwise. Prior studies utilised similar measure e.g., Florackis (2008), Henry (2010) and Ibrahim and Samad (2011).

H4: Board subcommittees are negatively associated with agency costs.

H4a: An effective audit committee is positively associated with lower agency costs. Building on the recommendations of the UK corporate governance code, that require all firms to have audit committee with at least three members, all are independent, one of them should have a recent financial expertise, and this committee should have three meetings during the year as a minimum; a composite measure was developed for to assess the audit committee effectiveness. ACE variable is a dummy variable that takes the value of 1 if the audit committee is composed of three members, all of them are independent, at least one of the has financial expertise and the committee meets three times at least during the year. This composite variable was introduced by Zaman, Hudaib and Haniffa (2011).

H4b: An effective remuneration committee is positively associated with lower

agency costs.

The UK corporate governance code recommends that firms should have a remuneration committee with three members with a majority of independent members. REMU-COM is a composite measure (dummy variable) takes the value of 1 if the remuneration committee comprise of at least three members, and the majority of those members are independent directors.

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H4c: An effective nomination committee is positively associated with lower agency

costs.

The UK corporate governance code recommends that firms should have a nomination committee with a majority of independent directors to assure the independence of the committee from the management. The UK corporate governance code does not mention the minimum number of the nomination committee; thus in this study, the researcher applies the minimum of three members similar to the audit and nomination committees. NOMINI-COM is a composite measure with the value of 1 if the nomination committee comprises of three members at least with a majority of independent members.

H5: There is a negative association between board ownership percentage and

agency costs

Board ownership (BRDOWN) is measured as the total percentage of the board directors’ shares to the total outstanding shares. Similar measure was utilised by Florackis (2008); Ibrahim and Samad (2011) and Chen, Hou and Lee (2012), among others.

H6: The identity of is the owner director has a significant impact on agency costs H6a: There is a negative association between CEO ownership percentage and

agency costs.

CEO ownership percentage (CEOOWN) is the CEO’s shares divided by the total outstanding shares; similar measure has been utilised in prior literature, e.g., Anderson et al. (2000), Klein (2002a).

H6b: There is a negative association between executive directors’ ownership

percentage and agency costs.

Executive directors’ ownership percentage (EXECOWN) is measured by dividing the executive directors’ shares by the total outstanding shares (Florackis, 2008). H6c: There is a negative association between non-executive directors’ ownership

percentage and agency costs.

Non-executive directors’ ownership percentage (NEDOWN) is measured as the non- executive directors’ shares divided by the total outstanding shares (Florackis, 2008).

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H7: There is a negative association between block holding percentage and agency

costs.

Following the prior literature (e.g., Daily et al. (1998); Eng and Mak (2003); Anderson, Mansi and Reeb (2004); Thomsen, Pedersen and Kvist (2006); Grove et al. (2011); Jallow et al. (2012), among others), the block holding ratio (BLK) is the total ownership percentage of blockholders holding 5% or more of the firm’s outstanding shares.

H8: The identity of the blockholders has a significant impact on agency costs.

H8a: There is a negative association between institutional block holding percentage and agency costs.

Institutional block holding ratio (INSTBLK) is the total ownership percentage of institutions holding 5% or more of the firm’s outstanding shares.

H8b: There is a negative association between individual block holding percentage and agency costs.

Individual block holding ratio (INDVBLK) is the total ownership percentage of individual investors holding 5% or more of the firm’s outstanding shares. Similar measure was utilised by Khan (2006).

In the following sections, the researcher reviews the different agency costs utilised in this study, in addition to firm characteristics variables that should be considered while examining the above-mentioned hypotheses; as these characteristics could affect the investigated relationship, the researcher represents the analytical procedures, before consolidating all the utilised variables in the study’s econometric models, and presenting the sample selection and data sources.