http://ijfr.sciedupress.com International Journal of Financial Research Vol. 11, No. 5; 2020 Published by Sciedu Press 414 ISSN 1923-4023 E-ISSN 1923-4031 Impact of Institutional Governance Tools on Reducing Agency Costs to Commercial Banks Listed in the Amman Stock Exchange Omar Fareed Shaqqour 1 1 Department of Accounting Science, Zarqa University, Jordan Correspondence: Omar Fareed Shaqqour, Department of Accounting Science, Zarqa University, Jordan. E-mail: oshaqqour@zu.edu.jo Received: May 15, 2020 Accepted: August 26, 2020 Online Published: October 4, 2020 doi:10.5430/ijfr.v11n5p414 URL: https://doi.org/10.5430/ijfr.v11n5p414 Abstract This study aims to identify the Impact of institutional governance tools on reducing agency costs in the banks listed in Amman Stock Exchange (ASE). To this end, the researcher has studied the impact of an institutional governance tools on reducing the agency costs. Which are: board of directors` size, board of directors` independent members ratio, number of audit committee meetings, ratio of debt-financing, market share and bank`s size. The agency costs are measured by three indicators: assets turnover ratio, operating expenses ratio and free cash flow indicator. Study sample comprises all 16 banks listed in the ASE, for which data are available in the ASE during period of the study (2017 – 2019). EXCEL and SPSS are used to identify descriptive characteristics of study and analyze data. Regression analysis method is also used to test the study hypotheses. The study results have concluded that agency costs increase with the increase in the board of directors size, the independent members ratio, number of meetings of audit committees, debt finance ratio and market share ratio. The study has also concluded, as per the operating expenses indicator, that agency costs increase with the increase of debt financing, while they decrease with the increase in the board of directors size. According to the free cash flow indicator, the study results have showed that the agency costs increase with increase in the board of directors size. Keywords: agency costs, institutional governance, Jordanian banks 1. Introduction As a result of the increase in companies` size and variety of their activities as well as the complexity of their business, not to mention the emergence of huge companies that are difficult to run and control their operational and administrative activities, owners have become unable to administer their own companies by themselves, since many lack the proper administrative, financial and operational experience of running a company. This has led many to entrust other people for the task in exchange for salaries and particular bonuses, thus, ownership has been separated from administration, and that led to what is known as the agency theory. The agency theory is based on the fact that owners or shareholders entrust managers with the work and activities necessary to achieve owners` objectives and interests, in exchange for certain management interests, namely receiving certain incentives and remuneration. Owners' interests may conflict with those of managers, as managers pursue their interests and objectives at the expense of owners or shareholders. The contractual relationship between owners and managers, known as the agency theory, has generated various problems, challenges and costs. Agency costs include costs paid by owners, in the form of remuneration and incentives, for managers in exchange for their accomplishment of entrusted tasks, as well as control costs, manifested in control procedures set by owners for fear of managers attempting to achieve their own interests at the expense of owners` interests, and finally, costs paid by the administration in preparing reports and additional information provided to the owners. In Jordan, like other developing countries, many companies encounter many challenges due to agency, namely, the increase in agency costs which constitute a burden to owners and threatens the continuity of the company`s business (Mansour, 2013). Therefore, it was essential to find ways to reduce agency costs through searching for the key factors affecting agency costs and causing their increase or decrease.