2018

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Testing Non Linear Impact of Debt Stock on Agency Cost
(UMT, 2018) Hafiz Muhammad Irfan
This study explores the concept of agency cost which is conflict between managers and shareholders. This relationship has been tested using data of 6 financial and 24 non-financial companies listed on Karachi Stock Exchange during the period of 2006 to 2015 And 30 Indian companies during the period of 2006 to 2015 from Mumbai Stock Exchange. As suggested by Jensen and Meckling (1976) that relationship between leverage and agency cost may not be quadratic and excessive high leverage may have positive effect on agency cost, this hypothesis is tested using regression model. Assets Turnover (ASST), advertising expense ratio (ARDR) and administrative expense ratio (ADMR) in case of Pakistan and India are used to proxy measure agency cost. For the case of India this study finds that there is an inverted of U shaped relationship between agency cost and debt in case of total asset turnover (ASST) and U shaped relationship in case of advertising expense ratio (ARDR) and administrative expense ratio (ADMR). In Pakistan, three proxies of agency cost is used, In asset turnover model debt shown inverted U shaped relationship, advertising expense ratio (ARDR) and administrative expense ratio (ADMR) shown U shaped relationship.