Ownership and Agency Cost

Abstract

This thesis examines the existence of agency costs in firms due to the incomplete alignment of the agent's and owner's interest. Inspired by empirical evidence of Ang, Cole and Wuh Lin (2000) and the theoretical models of Jensen and Meckling (1976) on agency costs, I empirically explore how agency costs vary with a firm's management and ownership structure. The thesis provides measures of relative equity agency costs for firms under different ownership and management structures. I present direct empirical evidence on this topic by utilizing a sample of 173 firms from the Stockholm Stock Exchange (SSE). I estimate two proxies for agency cost: Tobin's Q and Sales to Total Assets. Results show that the latter is a better estimator of agency costs. First, I find that agency costs are higher when an outsider manages the firm. Second, I cannot find any evidence that agency costs vary inversely with the manager's ownership share. Third, I find no evidence that agency costs should be related to the ownership concentration of the firms. However, agency costs increase with the number of nonmanager shareholders. Fourth, firms with higher debt ratios have lower agency costs, due to external monitoring by banks.