We examine the effects of the corporate governance regulations by estimating the size of the agency costs of the firm. To test the effects, first of all, we develop a firm valuation model under the assumptions of the existence of corporate taxes, bankruptcy costs, and agency costs. The model is an extension of M&M models (1958, 1961, 1963).
The model shows that the intrinsic firm values are sum of the four components such as the value of assets-in-place, the value of intangible assets, the value of growth opportunities and the compounding effects of tax benefits, bankruptcy costs and agency costs on the firm value.
And also the model naturally tells us that the after-tax weighted average cost of capital is determined by the four components such as the unlevered cost of capital, the expected tax-benefits, bankruptcy costs and agency costs on the cost of capital.
The empirical results in this study can be summarized as follows.
First, the agency costs of holding companies are about 9% less than non-holding companies.
Second, the agency costs of big business groups are about 10% higher than non-business groups.
In sum, the simplified ownership structure of holding companies helps to eliminate some agency problems, and, it contributes, in turn, to reduce the size of agency costs and then to increase the intrinsic values of holding companies.