The Effects of Product Market Competition on Agency Costs

In this paper, the effect of Product Market Competition on Agency Cost is investigated. In this regard, the effect of size is controlled. For measuring the Product Market Competition, the Herfindahl-Hirschman Index of sales and entry barriers is used. For measuring agency cost, two criterion is used. The first criterion is the interaction of the firm’s growth prospects and its free cash flows. We used Tobin’s Q as a proxy for the firm’s growth prospects. The other criterion is the assets turnover ratio.To test the hypotheses and data,multiple linear regression was used. findings of investigating 62 firms in the 2003 to 2011 show that as the firm competition power increases and on the other hand the degree of the product market competition decreases, the agency cost would significantly increase. Moreover, the strength of the research results using annual data were also exmined.