Effect of Executive Ownership on the Relationship between Agency Cost and Equity Mispricing
The purpose of the current work is to investigate the influence of agency cost on equity mispricing for the firms listed on Pakistan Stock Exchange during the period from 2008 to 2016. Agency cost is estimated by asset utilization ratio, mispricing is computed by book- to -market ratio and some firms characteristic such as size, profitability and leverage are taken as control variables. Balanced panel method is used to estimate the results. The sample is divided into two parts on the basis of stock mispricing; undervalued and overvalued firms. The influence of agency costs is then separately examined on both sub-samples. Moreover, the effect of managerial ownership on the relationship between agency cost and mispricing is investigated. Results show that agency cost is positively linked with equity mispricing. Moreover, findings demonstrate that for undervalued firms, effect of agency costs is stronger but for overvalued firm, it is weaker and negative. Results are consistent with previous studies.
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Agency cost, Equity mispricing, Information Asymmetry
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(1) Faiq Mahmood
Assistant Professor, Lyallpur Business School,Govt. College University, Faisalabad, Punjab, Pakistan.
(2) Amir Inam Bhutta
Assistant Professor,Lyallpur Business School, Govt. College University, Faisalabad, Punjab, Pakistan.
(3) Muhammad Usman
Assistant Professor,Department of Management Sciences,University of Gujrat, Punjab, Pakistan.
Do the Investment Distortions Affect the Performance of Non-financial Firms of Pakistan?
The investment decisions are very important for investors as it directly affects the firm's future profitability and shareholder's wealth. Firm managers are involved in making inefficient investment decisions in imperfect capital markets. This study aims to examine how the inefficient investment decisions influence the firm performance after controlling for the financial factors. The two steps System Generalized method of moments is used to examine the impact of investment distortion on firm performance. The empirical analysis is based on unbalanced annual panel data set of a sample of 324 non-financial firms listed on the Pakistan Stock Exchange for the period 2015 to 2017. The results show that investment distortion is negatively affecting the performance of non-financial firms in Pakistan; irrespective of the proxy used to measure the firm performance. These results support the information asymmetry theory and agency theory, which explains why managers are involved in making sub-optimal investment decisions at the cost of shareholders' wealth and why their inefficient investment decisions can damage the value of the firm.
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Agency Theory, Information Asymmetry, Investment Distortions, Performance
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(1) Sameen Aftab
Lecturer, Faculty of Management Sciences, International Islamic University, Islamabad, Pakistan.
(2) Faisal Rizwan
Associate Professor, Faculty of Management Sciences, International Islamic University, Islamabad, Pakistan.
(3) Abdul Rashid
Professor, International Institute of Islamic Economics (IIIE), International Islamic University, Islamabad, Pakistan.