Chrisostomos Florackis

The Impact of Managerial Entrenchment on Agency Costs: An Empirical Investigation Using UK Panel Data

This paper empirically investigates the relationship between managerial entrenchment and agency costs for a large sample of UK firms over the period 1999-2005. To measure managerial entrenchment, we use detailed information on ownership and board structures and managerial compensation. We develop a managerial entrenchment index, which captures the extent to which managers have the ability and incentives to expropriate wealth from shareholders. Our findings, which are based on a dynamic panel data analysis, show that there is a strong negative relationship between managerial entrenchment and our inverse proxy for agency costs, namely asset turnover ratio. There is also evidence that short-term debt and dividend payments work as effective corporate governance devices for UK firms. Finally, our findings reveal that agency costs are persistent over time. The results are robust to a number of alternative specifications, including varying measures of managerial entrenchment and agency costs.

Managerial incentives and corporate leverage: evidence from the United Kingdom

This paper investigates the effect of managerial incentives and corporate governance on capital structure using a large sample of UK firms during the period 1999–2004. The analysis revolves around the view that managerial incentives are important in determining a firms leverage. However, we argue that the exact impact of these incentives on leverage is likely to be determined by firm-specific governance characteristics. To conduct our investigation, we construct a simple corporate governance measure using detailed ownership and governance information. We present evidence of a significant non-monotonic relationship between executive ownership and leverage. There is also strong evidence suggesting that corporate governance practices have a significant impact on leverage. More importantly, the results reveal that the nature of the relation between executive ownership and leverage depends on the firms corporate governance structure.

Impatience, reputation and offending

Reconviction rates for offenders are high despite sentence severity increasing with the number of convictions. The standard one-shot model of crime provides little scope for exploring ‘persistence effects’, although recent papers by Emons and others have sought to put offending decisions into a more dynamic setting. This article develops a simple two-period model of offending in which criminal convictions act as an adverse signal in labour markets. Ordinary and multinomial logistic regression modelling is used to test the predictions of the theoritical model and explore the link between unemployment and convictions. The empirical results, which are based on longitudinal data from the National Child Development Study (NCDS) in the UK, strongly support the view that, ceteris paribus, individuals with previous convictions are at higher risk of being unemployed.

Corporate Governance and Performance: New Evidence Using Nonlinear Principal Component Analysis

This study revisits the link between corporate governance and performance using a carefully assembled dataset of UK-listed companies. A key aspect of our study is the use of Nonlinear Principal Component Analysis (NLPCA), which is preferred to standard principal component analysis as a more effective method to distill the complex dimensions of corporate governance into reliable summary scores. Our analysis suggests that there are two important dimensions of corporate governance. The first relates to the nature of the internal board processes within a corporation and the incentives of managers to expropriate wealth from shareholders. The second relates to the ability of large/controlling shareholders to exert a monitoring role and provide strong oversight of management performance. Using a GMM-based framework, we find that the first dimension of governance has a modest association with operating measures of performance (i.e. ratio of earnings to total assets, ROA) but not with market-based measures of performance (i.e. Tobin’s Q). On the other hand, the second dimension of governance strongly explains market-based but not operating measures of performance. The empirical findings also indicate that the magnitude of the economic significance of the governance proxies in the performance models, as well as the ranking of firms in terms of corporate governance quality, critically depends on the method utilized to measure corporate governance.