Impact of Corporate Governance Disclosure on the Principal-Agency Problem within the UK Oil Sector

ABSTRACT

Corporate governance is becoming the growing concern in the firms of oil sector as it is related with the relationship between corporation's management, board of directors and shareholders. In this regard, when conflict of interests arises within relationship between management of the firm and investors or the shareholders, a problem occurs referred to as the principal-agent problem. Accordingly, the disclosure of the corporate governance information is deemed by the firms to regain the trust and satisfaction from the investors over the management of the firm. In this regard, the objective of this research is to investigate the impact of corporate governance disclosure on principal-agent problem within the UK oil sector. The current research employed the quantitative research in which descriptive analysis, multiple regressions, t-test and Spearman's correlation of 5 years (2007-2011) of top 18 oil and gas companies listed in London Stock exchange has been performed. The research formed seven null hypotheses and subsequently their alternative hypotheses and confirmed that there is a positive impact of corporate governance information disclosure on addressing principal agent problem across the proxies of both variables. Similarly, the research investigated the corporate governance mechanisms that are related with disclosure of the information and hypothesized to exert the influence on the scale of principal agent problem present in the firm. The research concluded that there is positive impact of corporate governance disclosure across all four proxies (separate leadership, greater percentage of managerial ownership, and greater percentage of non-executive directors and composition of board committee with three structures) on addressing principal agent problem via indicating that their higher levels of disclosure of the information from the managers impact significantly and positively on asset utilization ratio, return on capital employed, dividend growth rate and capital structure while impact significantly and negatively on sales to management expense ratio. The result however found that there is insignificant impact of corporate governance disclosure mechanisms on Return on Assets of principal agency problem indicating that change in corporate governance disclosure by managers does not impact return on assets of firms within the UK oil and gas sector.

TABLE OF CONTENTS

ABSTRACTII

LIST OF TABLESVII

CHAPTER ONE: INTRODUCTION1

Background of the Study1

Statement of the Problem2

Research Questions4

Research Aims and Objectives4

Regulatory Framework Of Corporate Governance Code In UK5

Theoretical Framework6

Significance of Study6

Justification for Selecting UK Firms as Sample for Study7

Dissertation Layout8

CHAPTER TWO: LITERATURE REVIEW9

Introduction9

Corporate Governance10

Corporate Governance and Agency Theory11

CEO Duality15

Stakeholders' and Shareholders' Theory16

Asymmetric Information19

Stewardship Theory19

Resource Dependency Theory20

Institutional Theory21

Corporate Governance Control Mechanisms22

Internal Governance Mechanisms23

External Control Mechanisms25

The UK Corporate Governance Regulatory Framework25

The Market for Corporate Control27

Managerial Labour Market28

External Auditor28

Corporate Governance and Voluntary Disclosure29

CHAPTER THREE: METHODOLOGY31

Introduction31

Research Approach31

Sample Selection33

Data Collection Method34

Sources of Data Collection Method34

Research Hypotheses Development35

Dependent Variable - Principal-Agency Problem37

Asset Utilization Ratio37

Sales to Management Expenses Ratio38

Return on Assets39

Return on Equity39

Return on Capital Employed40

Dividend Growth Rate40

Capital Structure41

Independent Variable - Corporate Governance Disclosure and Mechanisms41

Separate Leadership42

Managerial Ownership42

Board Composition43

Board Committee44

Research Hypothesis45

Statistic Analysis46

Descriptive Statistic47

Regression Analysis47

T-Test48

Spearman's Rank Correlation48

Reliability and Validity49

Research Ethics50

Limitations of the Study50

CHAPTER FOUR: DATA FINDINGS & ANALYSIS51

Introduction51

Descriptive Statistics51

Dependent Variables52

Independent Variables57

Regression Analysis60

Asset Utilization Ratio60

Sales to ...