IMPACT OF AGENCY COST ON BUSINESS FLUCTUATION
With the emergence of agency theory in the 70s, there has been a general consensus among researchers that agency cost exists and manifest in diverse forms. In the study, we examine, the association between agency cost and business fluctuations. Agency cost is measured in two dimensions, its monitory cost and its bonding cost, while business fluctuation is measured in terms of the change in the net profit after tax. The cross-section survey research design was adopted as the blue print for data collection and the data so collected were analyzed by using the ordinary least square regression method as well as correlation analysis.
The result indicate that there is a positive association between agency cost and business fluctuation and only directors emolument had a significant and negative relationship with business fluctuation. Following from this result, it was recommended that managers should harmonize their respective interests to reduce excess monitoring cost on the organization.
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
Background to the Study
Statement of the Problem
Objectives of the Study
Scope of the Study
Significance of the Study
Limitation of the Study
Definition of Terms
CHAPTER TWO: LITERATURE REVIEW
Where Agency Conflicts Arise
Controls on Agency Problems
Block Holders and Institutional Investors
Managerial Share Ownership
Endogenity and Heterogeneity by in the Insider Ownership – Corporate
Summary of Agency Cost Reducing Mechanisms
Agency Costs and Business Fluctuation
CHAPTER THREE: METHODOLOGY
Measurement of Variables
Sources of Data
CHAPTER FOUR: PRESENTATION AND ANALYSIS OF DATA
CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
Summary of Findings
BACKGROUND TO THE STUDY
One serious and very important question that has pre-occupied researchers mind is the impact of agency cost on business fluctuation.
The separation of ownership and control is the natural outcome of the specialization needed for the corporate firm to respond to the changing needs of business. The specialization usually result from a division of labour in which there is a contractual arrangement between the shareholders (the principal) and the manager (the agent) to protect their respective interest.
Lowe and Rohling (1993) point out that with perfect information, this division of labour can be achieved by one party (the principal) hiring, another party (the agent) to perform certain specialized task. They noted that a fundamental problem facing the principal is the inability to costlessly write contracts with agent that cover possible outcome. This creates a potential conflict of interest between the principal and the agent, with agent having opportunities to engage in activities that are conflict of interest will give rise to various types of cost which affect the activities of the business in terms of the investment decision of the agent.
This portends a conflict of interest in which the agency cost will affect the direction of the business cycle. This research work therefore, aims at analyzing the agency cost and it consequential impact on the level of business fluctuation.
In this study, agency cost will be taken to mean monitoring and bonding cost. Monitoring cost is that cost named by the principal in monitoring the activities of the agent. On the other hand, bonding cost shall be taken to mean the cost incurred in setting up the principal agent relationship e.g. compensation cost and dividend paid or payable to the shareholder (principal) while business fluctuation means, recurrent fluctuation in the income (proxied in the study as the net profit after tax (NPAY) of the business.
STATEMENT OF THE PROBLEM
Agency costs are counter-cyclical; increasing in recession when firm’s asset values are most likely to be depressed, and decreasing in booms. Further, shocks may have asymmetric effect through the business cycle. Sharp deteriorations in the economy are more likely than sharp improvements, since there is a limit to the reduction in agency costs in good times. When agents experience growth conditions for a number of periods, eventually future investment projects can be self financed and agency cost tends toward zero (Lowe and Rohling, 1993).’
The problem of this study is to examine whether audit fees, directors’ emoluments, dividend paid, managers’ compensation have negative relationship on business fluctuations.
Based on the above itemized problems, the research questions are:
What is the relationship between the principal’s monitoring costs and business fluctuations?
What is the relationship between the bonding cost of agency relationship and business fluctuations?
OBJECTIVES OF THE STUDY
The objective of this project is to carry out an in-depth research on the following:
Ascertaining whether there is a significant relationship between the principal’s monitoring cost of his agent and business fluctuations.
To find out if there is a significant relationship between bonding cost of principal-agent relationship and business fluctuations.
SCOPE OF THE STUDY
This research study analyzes the impact of agency cost on business fluctuation.
The research is fully aware that most organization, and government parastatals and even the government as an agent of the state may be affected in one way or the other, but the scope of the study is mainly on the corporate organizations in Edo State within the period of five years.
SIGNIFICANCE OF THE STUDY
This research study will go a long way to provide solutions to the problem encountered by the principal and agent in discharge of their duties and obligation.
It will also enable the business organization to understand that the principal objective or agent cost on business is for the good of the organization and thus for the benefit of both parties.
Finally, apart from the business concern, it will equally serve as encounter problems in area, as a stepping stone to future researchers in this area.
There is no significant relationship between the principal’s monitoring cost of his agent and business fluctuations.
There is no significant relationship between the bonding cost of principal-agent relationship and business fluctuations.
LIMITATION OF THE STUDY
Limitation of this study will be the problems of unreliability of data obtained from the secondary sources. This is because data are often manipulated to suit political purpose.
Population: There are so many firms in Nigeria; it will be very cumbersome if not impossible for the researcher to study these firms in other to establish the impact of agency cost on business fluctuation.
Attitude of the respondent companies: Most of the respondents in the company interviewed were a bit strict in disclosing information relating to the internal operation of their business.
Geographical coverage: The distance of the organizations has made it difficult for the researchers to make a repeat visit to these firm due to lack of funds and time.
DEFINITION OF TERMS
Impact: The action of one body coming forcibly into contract with another; an effect or influence especially when strong.
Agency: A business or an organization that provide a particular services especially on behalf of other businesses or organization.
Cost: The amount of money you need or the total amount of money that need to be spent by a business.
Business: The activity of making, buying, selling or supply goods or services for money.
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