Shareholding Structure and Agency Cost of Listed Firms in Nigeria

Abstract

Corporate managers and owners have different self-interests hence agency issues arise due to the separation of ownership from management. The shareholding structure of a firm is viewed as part of companies’ governance mechanism and is considered an instrument to lessen the divergent interest between owners and management and lower agency costs. To this end, this study was conducted to examine the relationship between shareholding structure and agency costs of listed manufacturing firms in Nigeria. The quantitative research design was used in the study, which has agency theory as its foundation. Nigeria's listed manufacturing companies make up the study's population. The Generalised Method of Moments (GMM) approach was adopted to determine the relationship between shareholding structure and agency costs and to cater for possible endogenous factors. Findings of the study indicate a negative and a significant relationship between agency cost and the single largest shareholders, and employees' shareholding. The study also found that agency cost has a negative but not significant relationship with shareholding concentration and further revealed that board managerial shareholding and executive compensation have a significant positive link with agency cost. The study concludes that the agency costs of listed manufacturing firms in Nigeria are influenced by ownership structure, and recommends amongst others that board members should not be encouraged to have majority shares which could lead to managerial entrenchment and higher agency costs.

Keywords: Agency Cost, Shareholding Structure, Concentrated shareholding, Employees’ shareholding, board managerial shareholding