Impact of Foreign Shareholdings on Agency Cost: Empirical Evidence from Pakistan

Abstract

The purpose of this research is to investigate the effect of foreign shareholdings (FS) on agency cost and firm’s performance in nonfinancial listed firms of the Pakistan Stock Exchange (PSX). The authors employed the data set of agency cost, FS and corporate governance from 2012 to 2016. According to the recent literature Foreign Shareholdings (FS) can also be used as a powerful remedy to mitigate the dual type of agency problems. This study uses two proxies for agency cost, i.e. AUR and DER, and one for firm performance, i.e. Tobin’s Q, as dependent variables. Foreign direct investment is used as an explanatory variable and twelve independent variables. The study found that a higher level of the FS decreases the agency cost level under the asset utilisation ratio. It implies that foreign investment can benefit from employed assets due to superior abilities and advanced technology. While under discretionary expenditure ratio, FS has not significantly influenced agency cost. It is also found that FS significantly increase market base performance. The findings clarified that foreign investors play an important role in reducing agency costs and improving firm performance. In addition, the empirical evidence drifted towards the critical policy implication for emerging markets to allow foreign investors to invest in their firms to obtain maximum gains.