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This study investigates the direct and indirect relationship between corporate governance
and agency cost using bootstrap analysis. For a sample of 155 firms during 2009-2015,
this study finds statistically significant both direct effect of corporate governance on
agency cost of overinvestment, and an indirect effect mediated by information
asymmetry, with favoring the indirect effect as more important in reducing agency cost.
The direct effect shows that despite increasing corporate governance mechanism, the
agency cost of overinvestment is rising. However, the indirect effect suggests that the
corporate governance mechanism promotes transparency by exerting pressure on
management to produce information that investors and other stakeholders can use. This
creates a monitoring channel that reduces information asymmetry, thus reducing the
ability of management and majority shareholders to expropriate the firm’s resources that
mitigates overinvestment of free cash flow. The results provide implications for
regulators that the effectiveness of corporate governance practices should be watched
carefully to reduce managerial opportunism and controlling shareholders’ expropriation
in firms. Moreover, the regulatory authorities should collaborate with firms’
management to frame disclosure policies that investors can use as a monitoring device to
make firms unable to overinvest free cash flow
Samya Tahir, Muhammad Ali Jibran Qamar, Mian Sajid Nazir, Muhammad Usman . (2019) Does Corporate Governance Reduce Overinvestment? The Mediating Role of Information Asymmetry, Pakistan Journal of Commerce and Social Sciences, Volume 13, Issue 4.
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