Managerial discretion and agency cost in Indian market

This paper investigates empirically the impact of managerial discretion on agency cost from the perspective of SG&A cost asymmetry and examines how corporate governance moderates this relationship. The analysis shows mixed evidence in favor for cost behavior and managerial choices in the Indian market. The cost asymmetry involves not only cost stickiness but also the anti-sticky behavior of SG&A cost under certain circumstances. The main drivers for this disparity are owing to manager's resource adjustment decision, the future expectation of sales and managers' empire-building behavior. Furthermore, findings suggest that strong corporate governance alleviates empire-building behavior of managers. Additional analysis shows, the asymmetric behavior of SG&A cost in crisis period is mainly a result of managers' resource adjustment decision and future expectation of sales change. Manager's empire-building behavior does not play an explicit role in this period. Next, the findings show that managers' discretion is influenced by future value creation potential of SG&A cost. Manager's empire-building behavior is more pronounced in low-value creation sample firms compared to high-value creation sample. Thus, manager's choice for resource adjustment decision and empire-building behavior changes according to the future value creation of SG&A cost, financial conditions and corporate governance mechanisms in Indian companies. To the best of our knowledge, this is the first study performed in Indian capital market where the SG&A cost asymmetry tests the managers' empire-building behavior. Overall, findings of the study indicate manager's resource adjustment decisions and empire-building behavior caused by their consideration and this results in a form of agency costs. In comparison with developed markets, Indian markets have relatively less agency problem due to managerial empire-building behavior.