CASH UNLEASHED: A COMPREHENSIVE EXAMINATION OF MANAGERIAL ENTRENCHMENT AND HIGH FREE CASH FLOW'S INFLUENCE ON CORPORATE OUTCOMES

Abstract

The agency problem, as conceptualized by Jensen and Meckling (1976), posits a fundamental conflict of interest between managers and shareholders within a corporate structure. At the crux of their seminal work, Jensen and Meckling (1976) advocate for managerial actions aligning with the best interests of shareholders. Nevertheless, the real-world dynamics unfold a complex narrative where managers might deviate from this fiduciary responsibility, engaging in self-serving behaviors, thus giving rise to the agency problem. Extensive exploration within corporate governance literature has delved into the multifaceted implications of this agency problem, particularly its profound effects on firm value.

The heart of the issue lies in the potential costliness of the agency problem, leading to tangible repercussions such as compromised firm performance and elevated capital costs. This research aims to contribute to the overarching discourse surrounding the agency problem and its intricate relationship with firm value. By scrutinizing the existing literature and drawing connections to empirical evidence, this study seeks to illuminate the nuanced ways in which the agency problem manifests and influences the performance and financial landscape of firms.

To unpack the implications, this research delves into the cascading effects of the agency problem on firm value, exploring the nexus between managerial actions, shareholder interests, and overall corporate performance. By synthesizing insights from diverse studies, the aim is to offer a comprehensive understanding of how the agency problem permeates various dimensions of corporate governance and financial outcomes.

This study employs a critical lens to assess the costly nature of the agency problem, shedding light on its potential to erode firm value. Through an integrative approach, the research not only underscores the theoretical foundations laid by Jensen and Meckling (1976) but also endeavors to bridge the gap between theory and empirical observations in the contemporary corporate landscape. Ultimately, the findings of this study contribute to the ongoing dialogue on corporate governance, offering valuable insights for policymakers, executives, and stakeholders grappling with the challenges posed by the agency problem.