How does corporate governance affect firm performance? The mediating role of agency costs

Authors: Chih-Jen Huang, Min-Jeng Shiue, Yu-Shan Chang

Journal: Chiao Da Management Review. Dec. 2010, 30(2): 107-146.

Keywords: Corporate govemance; Agency costs; Corporate performance; Mediating effect

Abstract:
This is the first study on the mediating effect of agency costs on the association between corporate governance and firm performance. In the LISREL setting, we first examine the direct effect of governance on firm performance and agency costs. The results indicate a positive (negative) correlation between governance and firm performance (agency costs). We further include agency costs as a mediating variable; the results show that governance is negatively correlated with agency costs at a conservative level, whereas the impact of governance on firm performance remains significantly positive. This evidence indicates that agency costs play a partial intermediary role in the relationship between governance and firm performance. Specifically, decreasing agency costs is an important way for governance to improve firm performance. This paper contributes to the literature on the association between governance and firm performance by: (1) identifying the mediating effect of agency costs, (2) highlighting both the beneficial and maladministration-mitigating roles of governance, and (3) initiating a new research aspect for related topics.