Research On Factors Of Agency Cost From View Of Financial Flexibility

The SME board has been playing an important role in the construction of a multi-levelstructure economy market. Research on SMEs has always been a significant source intoinstitutional innovation. Especially after the economic crisis, SMEs are now seeking for moresuitable governance mechanism. Therefore, research of SMEs’ agency cost should be putunder an uncertain background. The principal element to measure uncertainty is financialflexibility. This paper is trying to work out ways to reduce agency cost of SMEs from thisnew view, and provide them suggestions into governance more effectively after economiccrisis.Under this circumstance, the article firstly chose the manufacturing enterprises of SMEboard as the research subject, and made a brief introduction of them from period of2007to2011. Secondly, by analyzing composite factors, it built a two-level model to measurefinancial flexibility. Thirdly, by adopting frontier analysis method it constructed productionfunction and efficiency function to measure agency cost and factors affecting it respectively.Furthermore, it is showed that41%SEMs have adopted stock ownership incentives by theend of2011. However, in this article we have found that managerial ownership which hasbeen the main means of stock ownership incentives has been going lower and lower in recentyears. So we re-constructed the model by adding managerial ownership, debt constraint andcash flows, expecting to delve into the proper financial policy.Through the above analysis, we believe that the current agency costs governance indexin SMEs is much high, reaching89.2%. Managerial ownership was lower and lower in thelast five years with an average of12.4%, and has no significant influence on agency cost.Except those with high financial flexibility, these samples turn out to have little agency costswhich may due to the significant negative correlation between cash flow and agency cost.Short-term incentive like compensation was significantly negative correlated with agencycosts, thus management should develop the beneficial effect of short-term incentive.Short-term debt financing accounts for a relatively low proportion and more SMEs tend to bein favor of long-term debt financing which can lower the agency cost to a large extent.Currently SMEs’ ownership structure is highly dispersed, which can effectively reduceagency costs, and ownership concentration also presents a good performance. Externalcompetitive pressure can significantly remit agency costs under lower level of financialflexibility. Based upon the above analysis, we suggest SMEs adopt a low or medium level of financial flexibility.The results of this article can provide a convenient tool to the stakeholders and the publicto assess financial policy of a company’s financial policy. It can also give useful advises tomanagement in SMEs in how to lower agency cost and what is the proper level of keepingfinancial flexibility under the present uncertain background.