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Agency Cost - the Debt Policy of the Firm

Autor:   •  April 2, 2018  •  897 Words (4 Pages)  •  154 Views

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of management that can be used by them for the wasteful activities. So the profitability of the firm is positively related to the agency cost. Ahmad (2009) stated that a profitable firm always holds more cash that can be misused by the manager of the firm. The larger firm caries less free cash flow this is due to the fact that the larger firm carries more operations that increase the expenditures of the firm and reduce the profitability of the firm. Larger the firm less cash flow is available to be used by the manager for the wasteful expenditures. Large firms bears less agency cost of free cash flow. Our study confirms the results of Henery (2010) that larger firms are relatively less profitable which leaves lower cash flows available to the manager to be disinvested by them. There are some recommendations for the government, investors and the mangers to control the agency cost associated with the free cash flow. Firstly certain convents between the principal and the agents are also needed to limit the management decisions on investments undertaking to restrict the investment of firm free cash in non value adding projects. Complex contractual arrangements between the managers and owner of the firm. That protects the right of the owner on the free cash flow of the firm. Agency cost may be also minimized by forming the rules prohibiting the conduct that is reliably identified contrary to the interest of the principal. There are some alternatives for future research and the first one is that this topic is further studied by conducting research including different variables and different sectors. Another extension would be including private firms. Due to the difficulty to find the necessary data for non listed firms, this research only involves Karachi listed firms. It is possible that in the future this data becomes better available. It is then interesting to find out in what kind of way non listed firms act to mitigate agency problems. There are other proxies including cash flow, modified cash flow and firm discounted cash flow that is also used to see the impact of leverage on agency cost of free cash flow. This will help in examining the more precise impact of the leverage on the agency cost of free cash flow

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