The Impact of Corporate Governance Mechanism on Agency Cost: An Empirical Evidence of Pakistani Listed Companies

This study attempts to investigate the role of Corporate Governance in mitigating agency cost. For this purpose a sample of 100 firms selected on the basis of 100 INDEX of Karachi Stock Exchange during the period 2007 to 2011. To do so, alternative proxies for agency costs are employing: the ratio of total sales to total assets (asset turnover) and the ratio of selling, general & administrative expenses (SG&A) to total sales. Multivariate fixed effect regression is used to analyze the data. The explanatory variables include director ownership, institutional ownership, ownership Concentration, board size, CEO/Chair duality, Non Executive Directors, Debt Ratio, remuneration structure and board independence. The analysis is controlled for the influence of company size. The results show that higher director and institutional ownership reduces the level of agency cost. Smaller sized boards also results in lowering agency cost. Board independence has positive association with asset utilization ratio. The separation of the post of CEO and chairperson and higher remuneration lower agency cost. Bank debt constitutes one of the most important Corporate Governance devices for Pakistani Listed Companies. Also, managerial ownership, managerial compensation and ownership concentration seem to play an important role in mitigating agency costs.