On agency costs and firms' decisions

This research examines and provides further empirical evidence about agency cost theory. Four proxies for agency costs are presented and analyzed. They include free cash flow as a percentage of total assets, proportion of firm assets not invested in fixed plant and equipment, the liquidity of firm assets, and research and development intensity of the firm. Ordinary least squares is used to test agency cost theory. In addition, two-stage and three-stage least squares are employed on a system of equations. The study utilizes Fortune 500 data from 1992--1996. The results indicate that the proportion of firm sales made overseas is a determinant of agency cost. There is a significant negative relationship between insider ownership and free cash flow. There is also a negative relationship between debt ratio and free cash flow. In addition, the higher the institutional ownership, the greater the free cash flow. There is little relationship between dividend payout ratio and the various proxies for agency cost. There is a strong positive relationship between Tobin's Q and the agency cost proxies.