The impact of corporate governance quality on principal-agent and principal-principal conflict in Indonesia

This study analyzes the effect of corporate governance (CG) quality on principal-agent (PA) and principal-principal (PP) conflict in Indonesia while also controlling for potential endogeneity through the use of two-stage least squares (2SLS) regression. The results for PA conflict (measured by operating expense ratio and asset utilization ratio) are consistent with the notion that better CG quality leads to a lower level of PA conflict. Furthermore, the result for PP conflict is also consistent with the notion that higher corporate governance quality led to lower level of PP conflict. A higher CG quality is positively related to a higher dividend payout ratio and lower level of wedge (difference between cash flow and control right), which indicates a lower PP conflict level. Moreover, further robustness tests showed that most aspects of CG have similar effects on PA and PP conflict. Better board efficiency, internal control management, board remuneration system and stakeholders related CSR has a significant effect on reducing PA and PP conflict. Interestingly, we find no significant relationship between shareholders' relation and all PA and PP conflict measures.