The Role Security Analysts in Reducing Agency Costs in Companies Listed on the Kuala Lumpur Stock Exchange

Ahmad Rizal, Mazlan (2003) The Role Security Analysts in Reducing Agency Costs in Companies Listed on the Kuala Lumpur Stock Exchange. Masters thesis, Universiti Utara Malaysia.

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Abstract

The objective of this dissertation was to examine whether the monitoring activity performed by security analysts in Malaysia is a positive function of the level of potential agency costs in companies. This objective was based on Jensen and Meckling's proposition (1976) that security analysis performed by analysts functions as an external monitoring device in terms of reducing agency costs. Therefore, when the potential agency-related problems in a company are great, analyst research activity should be greater than when potential agency-related costs in a company are low. Based on previous studies, seven determining variables were selected as proxies for agency costs, with the number of analysts following a company (NAF) was selected as the dependent variable. SIZE, GROWTH and EXPENSE were expected to be positively related with NAF, while INSIDER, DEBTRATIO, INSTITUTION and EFFICIENCY were hypothesized to be negatively related to NAF. Using a sample of 105 companies that were included in the International Brokerage Estimates Services (IBES) earnings forecast database published in The Edge as at January 2002, a multiple regression model that was similar to that of Moyer et. al. (1989) was used to explain the amount of security analysis monitoring of individual companies. A relatively high correlation (-0.339) was recorded between GROWTH and EXPENSE. However, a subsidiary auxiliary regression performed for GROWTH against the rest of the independent variables and EXPENSE against the rest of the explanators produced R2 figures that were relatively smaller than the overall R2 of the model. This rejected a multicollineariy problem among the determining variables in the model. For the multiple regressions using enter procedure method, the results produced an R2 of 60.4% with an F-value of 23.697 and a probability of 0.000. Among the independent variables, only INSTITUTION and SIZE were statistically significant at alpha = 0.05. Next, when a stepwise regression was conducted, the results indicated that the adjusted R2 improved to 0.9% (F-value of 81.852 and a probability of 0.000) and INSTITUTION and SIZE once again became the only significant explanatory variables. The findings concluded that institutional ownership and size of companies were the factors that can significantly explain Malaysian security analysis monitoring activity in reducing the agency costs in companies. Therefore, to a certain extent, Malaysian security analysts play the monitoring role in reducing the agency costs in companies listed on the KLSE.

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