The Impact of Agency Capital on Company Value - An Integrated Reporting Approach - Evidence from South Africa
Felix Chirairo
ABSTRACT
The measurement and reporting of the impact of agency capital on firm value has remained an elusive empirical and practitioner question. The advent of Integrated Reporting (IR) was initially considered as presenting an opportunity for firms to be able to measure and report on the contribution of non-financial capitals towards firm value creation. However, the IR framework fell short of providing a holistic solution as it lacked a measurement tool that could be used by IR report preparers, analysts and other users of corporate reports. Adopting the Agency theory lens, this study decomposed agency capital into two proxies, Directors’ remuneration and Debt to Equity ratio that were used in a regression model. The findings of the study show that Agency capital has an impact on company value using market share price as a proxy.
Research Aims: While South Africa has globally recognised corporate governance processes guided mostly by the King Reports, the impact of agency capital (directors’ influence) on company value is still a pertinent academic and practitioner question. This study was carried out to measure the impact of agency capital on the value of JSE-listed companies, develop a measurement model and offer recommendations to academics, integrated reporting practitioners, boards of directors and other stakeholders.
Design/Methodology/Approach: The study utilised data obtained from a sample of 91 JSE-listed companies, with company value as the dependent variable and directors’ remuneration and debt to equity ratio as independent variables. Company value proxies used are market share price, Economic Value Added, TobinQ and share price at book value. Using secondary data from the IRESS database, the impact of agency capital was assessed through the use of regression equations.
Research Findings: The study reflected statistically significant relationship between market share price and agency capital. Economic Value Added, TobinQ and share price at book value returned statistically insignificant correlations to the independent variables. The results provide indications on the criticality of agency capital in the value creation activities of companies.
Theoretical Contribution/Originality: The agency capital model developed in this study provides a measurement tool for investors and other stakeholders that have an interest in the impact of agency capital on company value creation.
Practitioner/Policy Implications: Corporate governance practitioners, integrated reporting practitioners, academics and corporate reporting standard setters should consider the impact of agency capital on company value when making company value creation strategies. Directors’ remuneration and directors’ discretion on corporate debt become fundamental points of reference for setting remuneration practices and key performance targets for directors.
Research Limitations: The study was based on companies listed on the Johannesburg Stock Exchange (JSE). This excludes companies not listed on the JSE. The companies experience the same challenges as listed companies. This limitation is mitigated by the inclusion of all sectors for listed companies, making it possible for generalisation of findings and recommendations even to non-listed companies.
