Internal Corporate Governance Mechanisms and Agency Cost: Evidence from Large KSE Listed Firms

Abstract

The purpose of the study is to analyze various corporate governance mechanisms that reduce agency cost. For the period 2003-2010 we have selected 120 firms on the basis of market capitalization listed on the “Karachi Stock Exchange”. We used two proxies’ asset utilisation and asset liquidity ratios to measure agency cost. A higher asset utilization ratio means lower agency cost whereas a higher asset liquidity ratio means higher agency costs. Board and committee activities, board size, CEO/Chair duality, CEO tenure, %Block ownership, %largest investor and debt financing are used as independent variables. The result shows that variables board and audit committee activities and asset utilisation ratio has strong positive correlation. However block ownership, board size, duality and asset utilization ratio appears to have negative correlation. When we use asset liquidity ratio as the dependent variable agency cost is reduced with frequent board meetings. The variables board size and CEO tenure has positive correlation with asset liquidity ratio. Block ownership and asset liquidity ratio has negative association. Furthermore variables duality, debt financing and largest investor has insignificant relation with asset liquidity ratio.

Keywords: Asset Utilization Ratio, Asset Liquidity Ratio, Corporate Governance.