International Journal of Advanced and Applied Sciences

Int. j. adv. appl. sci.

EISSN: 2313-3724

Print ISSN:2313-626X

Volume 3, Issue 7  (July 2016), Pages:  41-45

Title: The relevance of agency conflicts in small and medium enterprises

Authors:  Farzan Yahya 1, *, Syed Atif Ali 2, Zahiruddin Ghazali 3


1School of Economics, Finance and Banking, Universiti Utara Malaysia, Kedah, Malaysia

2COMSATS Institute of Information Technology, Lahore, Pakistan

3Othman Yeop Abdullah Graduate School of Business, Universiti Utara Malaysia, Kedah, Malaysia

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The agency theory posits that the separation of control and ownership in firms leads to agency conflicts. Previous studies have focused on the relevance of these conflicts in large public listed companies; however, very few studies have demonstrated the role of agency conflicts in small and medium enterprises. This paper has presented theoretical and conceptual arguments regarding to types of agency conflicts prevail in SMEs and the solutions to mitigate them. Firstly, this study has demonstrated the conflicts of interest emerge between creditors and managers. It is postulated that underinvestment (debt overhang) issue can be resolved through short-term debts, the asset substitution (risk-shifting) problem can be mitigated by aligning the economic life of asset with debt maturity and overinvestment issue is likely to be reduced by increasing debt maturity. Secondly, to overcome principal-agent conflict, it is recommended that SMEs should have demand for voluntary external auditing regardless of their size to improve the monitoring mechanisms in the firms. This paper has also specified the directions for futuristic research especially in the context of developing economies. 

© 2016 The Authors. Published by IASE.

This is an open access article under the CC BY-NC-ND license (

Keywords: Agency conflicts, SME, Asset substitution, Debt overhang, Free cash flows, Auditing

Article History: Received 27 May 2016, Received in revised form 20 July 2016, Accepted 20 July 2016

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Yahya F, Ali SA, Ghazali Z (2016). The relevance of agency conflicts in small and medium enterprises. International Journal of Advanced and Applied Sciences, 3(7): 41-45


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