Impact of governance mechanisms on agency costs in CAC 40 listed firms : an empirical analysis (2005-2023)

Abstract

This empirical investigation examines the influence of corporate governance mechanisms on agency costs among firms listed on the CAC 40 index from 2005 to 2023. Agency costs were evaluated using three proxies: asset turnover ratio, selling, general and administrative expenses, and the interaction between free cash flow and Tobin's Q ratio. The findings suggest that larger board sizes are more effective in reducing agency costs within the studied French firms. Contrary to traditional agency theory predictions, higher managerial ownership did not correlate with reduced agency costs; rather, it was associated with increased costs. However, at high levels of managerial ownership, a reduction in agency costs was observed, challenging the notion of managerial entrenchment behavior within these firms. The analysis also indicates that CEO duality, board independence, ownership concentration, and institutional ownership contribute negatively to asset utilization efficiency, thus increasing agency costs. These results raise questions about the effectiveness of these governance mechanisms in the French regulatory and corporate environment. Furthermore, the study reveals that the effectiveness of specific governance mechanisms, such as board size and independence, as well as executive and non-executive ownership, is contingent upon the firm's growth opportunities. Specifically, board size appears more effective in low-growth firms, whereas mechanisms like board independence and diverse ownership structures benefit high-growth firms. This study enhances understanding of how corporate governance can influence agency costs, emphasizing the importance of aligning governance structures with firm growth trajectories.