Research on implication of convergence of interest hypothesis: Evidence from listed firms

© 2017 - IOS Press and the authors. All rights reserved. The purposefulness of the study is to test the convergence of interest hypothesis in Pakistan. Convergence of interest hypothesis illustrates that when the firm is owned by its own managers; it possesses lesser extent of agency cost. If the firm is largely owned by individuals who have not a role in the day to day management of the firm, then it has more cost of monitoring its management. It is because when ownership and management are in same hands, then owner-manager interests are converged. We examined this proposition employing the financial statistics of top 100 (capitalization wise) companies of KSE 100 index. The study has utilized fixed and random effect model of GLS Regression to deduce results. Results have emphasized that Agency Cost decreases in firms which have the significant proportion of insider ownership. Firms having more growth opportunities and larger amount of debt employed in their capital structure, exhibit lower agency problem but large sized firms have more agency cost. Results are important in a sense because it remained undiscovered before this study in the context of emerging economy like Pakistan. The study also gives strong suggestions to policy makers, investors and managers.