AGENCY COST OF TYPE I AND ACCOUNTING NUMBERS IN AUSTRALIA AND INDIA

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Abstract

This paper has as objective to assess the agency cost of type I on the value relevance of accounting numbers (earnings and book value) for all listed firms in the manufacturing, retailing and service industries in Australia and India from 2005 to 2012 using the modified version of the Ohlson’ model in Faud and Mohd, (2008) where price is express as a linear function of earnings, book value and various accounting numbers. As predicted, the results show that both earnings and book value are value relevance for the manufacturing, retailing and servicing industry in Australia and India. The presence of the free cash flow agency problem caused the value relevance of earnings and book value to decline in Australia and India. However, the effect is not stable across the difference industries. The results show that in the manufacturing industry, the effect caused by the free cash flow agency problem is relatively higher for Australia and India than in the retail and service industries. As a result, the firms in the manufacturing with free cash flow agency problem have lower earnings (book value) coefficients than those without free cash flow agency problem.

Keywords: Free cash flow, agency cost of Type I, Earnings, Book value, Stock price

How to cite this paper: Lious, N. A. T., Chettah, O.B., & Masárova, E.(2016). Agency cost of type I and accounting numbers in Australia and India. Corporate Ownership & Control, 13(4-2), 307-316. https://doi.org/10.22495/cocv13i4c2p4