The Effect of Agency Costs on the Speed of Stock Price Adjustment: Evidence of Tehran Stock Exchange

Abstract

The investigation of the effects of agency costs on the firms’ performance and investors’ decision is very important. The purpose of this study is to evaluate the effect of agency costs on the speediness of stock price adjustment. To measure the agency costs, three variables of the ratios of operating costs to sales, asset turnover, and the interaction between growth opportunities and free cash flows were used and to measure the speed of stock price adjustment, Hou and Moskowitz method was applied. The population of this research consists of firms listed in Tehran Stock Exchange. The study used data from the years 2008 to 2014 for 130 companies. To analyze the data and test the hypothesis, correlation and regression method is used. The results indicate that the ratio of operating costs to sales significantly affect the speed of stock price adjustment. However, no significant effect of the asset turnover and the interaction between growth opportunities and free cash flows on the speediness of stock price adjustment was seen.

Keywords

• Agency Costs
• Speed of Stock Price Adjustment
• Stock Price