A Review on Agency Cost in China

Under the modern corporate system, one of the basic problems of corporate governance is to reduce the agency cost, but it is under the influence of the company’s internal governance structure and external environment. Since agency cost problems in corporate governance have been a research hot spot, this paper teases out a profile of relevant research achievements of agency costs from 2012 to 2017 in China, and summarizes the influence factors and the economic consequences relating to agency cost in the form of literature review. After some discussion and argument, this paper analyses the trend of the existing research and puts forward the future research prospects in this field that is spillover effect of agency costs at the macro micro level.


Introduction
Modern companies are the integration of team power with a number of living individuals, including managers, employees, shareholders, creditors, and so on.
For a long time, economists chronically assume and think that these parties have a common goal and orientation, but actually there is a conflict of interests among economic individuals. And companies have been trying to reconcile these contradictions. Therefore, it has always been the focus of scholars in the field of corporate finance and capital markets.
Over the past three decades, economists have worked hard and developed the so-called "agent theory". In Principles of Corporate Finance by Richard A. Brealey and Stewart C. Myers, it is listed as one of the seven most important concepts in corporate finance [1]. Strictly speaking, agency theory is one of the inter disciplinary research achievements in economics and finance. It is the emergence of agency theory that drives us to make a breakthrough in the study of the internal Open Journal of Business and Management structure of the black box of enterprises.
With detailed data, Adolf Berle and Gardiner Means (1932) observed the separation of control and ownership in the United States in the 1920s and 1930s, and pioneered the study of corporate governance [2]. Jensenand Meckling (1976) defined the agency cost and discussed the agency problem in Theory of firm: managerial behavior, agency costs and ownership structure [3]. The agency cost seems to be the inevitable product of modern stock company (Harold Demsetz, 1988) [4]. Since then, most researches on corporate governance issues started through agency costs, and tried to find ways to reduce agency costs and alleviate agency problems, which is one of the basic objectives of corporate go- In the most recent case, take Vanke as an example. As the first listed company to survive and the country's leading real estate company, the competition for equity between Vanke management and outside shareholders raises new questions about the principal-agent relationship between the executive team and the shareholders. How to alleviate the problem of agency has become one of the important topics that listed companies have to pay attention to.
In the past five years, domestic scholars have also made a lot of research on this area and made some achievements. They try to find a good way to reduce agency costs and ease the agency problems in China with a unique economy in transition. Thus this paper attempts to focus on the recent research of agency cost in the last five years, summarizes the impact factors and economic consequences involved in the literature in the form of literature review, and summarizes the current research trends. The future research prospect of this field is put forward.

Definition
According to Jensen and Meckling (1986), the principal needs to pay the price for preventing agents from damaging their own interests, for instance, they take actions to restrict agents' behaviors through strict contractual relationships and strict supervision on agents. It is the price the principal has to pay that the agency costs [5]. Agency costs include delegated monitoring costs, the guarantee cost The supervision cost of the client refers to the incentive and monitoring cost of the principal to make the agent do everything possible to pursue maximum benefit of the principal; The guarantee cost of the agent means the cost that the agent guarantees not to damage the interests of the principal, and vice versa the cost of compensation. As for the residual loss, it signifies the loss of value arising from the decision of the principal on behalf of the agent. Assuming that the agent and the client share the same information and talents, the residual loss is equal to the difference between the two parties' decision-making.

Measurement
Asset turnover ratio, operating expense ratio and management shareholding ratio are the frequently used indicators to measure the agency problem between shareholders and management. Asset turnover is very intensively effective in measuring the company's investment decisions and the assets turnover management, while operating expense rates focus on measuring overconsumption of the management and other agency costs (Ang, 2000, Singh & Davidson, 2003 [6] [7]. Luo Wei and Zhu Chunyan (2010) contend that it is feasible to measure the agency cost between shareholders and management by the proportion of managerial ownership [8].
For the proxy problems between shareholders and creditors, Mello and Parsons (1992) demonstrate the incentive effect of capital structure by using undetermined equity model and measure the agency cost of creditor's rights [9].
Prowse (1992) blazed a new trail to scale such agency costs by using ratio of cash and tradable securities to total assets [10]. McKnight and Weir (2009) measure the total agency cost by the ratio of sales income to total assets and the number of mergers and acquisitions, and propose that agency cost is a function of free cash flow and growth opportunity [11].
In general, agency cost can be summed up as the cost of principal relationship.
As mentioned above，it can be divided into three types in accordance with the signing and execution process. From the perspective of static analysis, scholars focus on share holders and management, shareholders and creditors. Most of the existing studies indirectly measure the agency cost and seldom directly measure it. It can be seen that it is difficult to quantify directly agency costs, which poses the severe requirement of exploring new methods for empirical research.

Influencing Factors of Agency Cost in the Past Five Years' Research
The existence of agency cost directly leads to the reduction of corporate value.

Economic Consequences of Agency Costs
The early research on the economic consequences of agency cost started from the macroscopic and macroscopic levels respectively. The former includes capital structure and financing activities, while the latter involves business cycle, also indicates the principal-agent problem in corporate philanthropy [28].
With regard to the relationship between agency cost and company performance, there is no unanimous conclusion up to now. Yao Guoxuan and Wu Qiong (2014) analyze the relationship between equity incentive, agency cost and corporate performance in China's financial insurance industry and their results show a negative correlation between agency cost and firm performance [29].
Aiming at the double principal agent problem and using the panel data of China listed company, Chen Wenqiang (2015) constructed the intermediary effect model of "equity incentive-agency cost-enterprise performance", empirically test how equity incentive affects enterprise performance and agency cost, and how the agency cost acts on the relationship between equity incentive and enterprise performance [30]. The results show that equity incentive has a significant effect on corporate performance, and it is effective to restrain the first kind of agency cost, nevertheless, the governance effect on the second kind of agency problem is not significant. The first kind of agency cost plays an intermediary role between equity incentive and enterprise performance, to put it another way, equity incentive restrains the first kind of agency cost, and then indirectly promotes the enterprise performance with no sign of mediating effect of second one.

Research Prospects and Conclusions
Most of the researches are based on the rational human hypothesis and ignore As for the agency cost of economic consequences, most concerns are related to governance issues at the company level in that the basic goal of corporate go-Open Journal of Business and Management vernance is to relieve the principal-agent problem and improve the efficiency of principal agent, especially in China setting with the imperfect system. For the state-owned listed companies in China, there is a double or multiple agency relationship, so it is far from enough to simply apply or imitate the existing achievements of foreign agency theory. We also must combine our country's special national condition to give the concrete analysis. In my eyes, the study of governance efficiency at the micro level can be improved and deepened. Meanwhile, our research should take into consideration the social impact of enterprises and social roles with the wide vision and more interdisciplinary research. At the corporate level, we can consider the influence of agency cost on the communication of information within the organization, especially financial information.
It can be seen from the above review that the scholars' conclusions on the in-