Rebalancing the Corporate Governance & Role of Indifference Theory: A Way of taking the Stress out with Substitute Mechanism

Abstract

We provide the rational and theorem of rebalancing the corporate governance and taking the stress out with substitute mechanism explains whether the insider ownership and leverage can be considered as substitute mechanism to reduce the agency cost, which means we are indifferent either using financial leverage or insider ownership to control the agency cost. Assuming other things constant; such as magnitude of effect on agency cost & adding debt could create direct and indirect bankruptcy risk. We utilize a sample of 41 firms from the SBP/SDWD database and find an influential rebalancing agency approach under the shadow of indifference theory. Hence, this study answers the question that insider ownership and leverage can be considered as substitute appliance or mechanism geared at reducing the effect of agency cost.

Keywords: Indifference theory; Governance liberalization; Insider ownership; Substitution mechanic; Leverage; Asymmetric information