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Information Sciences Letters

Information Sciences Letters

Abstract

The objective of this study investigates the impact of corporate governance (CG) on agency costs (AC) in Jordanian service companies. The analysis is conducted using the random-effects model on a sample of (42) service companies listed in the Amman Stock Exchange, during the period (2012-2018). Independent variables are used (Board Size, CEO Duality, Audit Committee, Managerial Compensation, Dividend, & Leverage). AC are measured by Asset Turnover Ratio (AT), Selling, General & Administrative Expense Ratio (SG&A) & Free Cash Flow (FCF). This study also includes three control variables: firm size, firm growth & firm profitability. The results of this study, according to the AT index, leverage increases AC through decreasing AT ratio, and this indicates that management uses the borrowed funds in an ineffective manner. The results, according to the SG&A index, are that AC caused by squandering the companies resources on managerial privileges and discretionary expenses are low in large companies and in companies that have high profits. While the results, according to the FCF index, are that the separating of the positions of chairman of the board and CEO & dividend decrease AC through decreasing FCF available under management control, and we find AC caused by possible misuse of FCF are more existing in large companies and in companies that have high profits. This study recommends the Jordanian service companies pay a dividend to shareholders and recommends the Jordanian legislative bodies oblige companies to apply some CG mechanisms, instead of compliance or explain approach. An example includes separating the positions of chairman of the board and CEO for their effective role in reducing AC through reducing FCF available under management control.

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