Surveying the Effect of Corporate Governance in Reducing Agency Costs: A Structural Equation Modeling Approach

The main purpose of this article is to examine the effect of corporate governance in reducing agency costs by using structural equation modeling approach. The data used, has been extracted from financial reports of the 68 firms listed in the Tehran Stock Exchange in the period of 2006-2012 (1385 to 1391 Iranian calendar). Agency costs as dependent variable (latent variable) are measured by observed variables those are: Tobin's q, asset-utility, discretionary expenses, free cash flows and leverage ratio. Corporate governance as independent variable (latent variable) are measured by observed variables those are: percentage of institutional investors, board of director’s size, percentage of non-executive board members, auditor type and internal audit unit. In addition, firm size and growth opportunities are entered to the model as control variables. The results show that corporate governance has a significant and negative effect on agency costs. Thus, corporate governance can be helpful in reducing conflict between management group, shareholders and other beneficiaries.