The Impact of Managerial Entrenchment on Agency Costs: An Empirical Investigation Using UK Panel Data


  • The authors would like to thank an anonymous referee, Ozgur Arslan, Yilmaz Guney, Stavroula Iliopoulou, Turalay Kenc, Dennis Leech, Anthony Patterson, Peter Smith, Margaritis Voliotis and seminar participants at the European Financial Management Association annual meeting (2004), European Financial Management Association Symposium on Corporate Governance (2005), Multinational Finance Society Annual Meeting (2005) and ASSET Annual Meeting (2005) for helpful comments and suggestions on earlier versions of the paper. Correspondence: Aydin Ozkan.


This paper empirically investigates the relationship between managerial entrenchment and agency costs for a large sample of UK firms over the period 1999–2005. To measure managerial entrenchment, we use detailed information on ownership and board structures and managerial compensation. We develop a managerial entrenchment index, which captures the extent to which managers have the ability and incentives to expropriate wealth from shareholders. Our findings, which are based on a dynamic panel data analysis, show that there is a strong negative relationship between managerial entrenchment and our inverse proxy for agency costs, namely asset turnover ratio. There is also evidence that short-term debt and dividend payments work as effective corporate governance devices for UK firms. Finally, our findings reveal that agency costs are persistent over time. The results are robust to a number of alternative specifications, including varying measures of managerial entrenchment and agency costs.