Impact of agency cost on firm performance : Case of listed firms on Ho Chi Minh city stock exchange (HOUSE)

Abstract

This research focuses oninvestigating how agency costs influence firm performance. The research purpose is specifically to test the agency theory based on the empirical data from Hochiminh City Stock Exchange (HOSE). The study uses the standard free cash flow and two proxy variables to measure agency cost. It is found from the testonfree cash flow that thisvariable does not support the agency theory, which casts doubt to the free cash flow hypothesis and the actual relationship between free cash flow and agency costs. Excluding insignificant proxy variables of agency cost and including only total asset turnover and operating expense ratio as sufficient agency cost measures, the study finds evidence to support the agency theory, meaning agency cost has a significantly negative impact on firm performance. The study provides better understanding of the association between agency cost and firm performance, indicates which measures are sufficient to measure agency cost, and prompts the need to reinvestigate the relationship between free cash flow and agency cost in future research.