This website uses cookies to ensure you have the best experience. Learn more

Corporate Finance Essay

1674 words - 7 pages

To what extent is it true that as a result of agency costs shareholders wealth will not be maximized by corporate management. If so, what actions can shareholders take to correct the situation?

As we know that agency costs exists in most corporations since the separation of ownership and management in large businesses. Shareholders are the principals and owners; managers are the stockholders’ agents. The problem is to get between shareholders and managers since they have different objectives. Shareholders’ goals are maximizing firms’ value, managers’ goals are benefit themselves, thus the conflicts rise in the company. In this report through concept of agency ...view middle of the document...

Shareholders want to take the project since that has opportunity to increase the value of the firm, but manager may get blame once the project is not successful. At this situation the agency costs are incurred.

Brealey (2006) noted that agency costs are incurred when managers do not attempt to maximize firm value and shareholders incur costs to monitor the managers and influence their actions. Of course, there are no costs in a sole proprietorship when the shareholders and managers are same person. In corporations principal-agent conflicts arise in a number of ways. First they have different objectives between shareholders and managers. Shareholders’ goals are that maximize firm’s wealth; managers’ goals are that maximize their own self –interests or increase employee benefits and increase the size of the company so that improve their job security. Second, as managers consequently running the company on a day-to-day basis, have access to accounting data and financial reports, where shareholders only receive annual reports. Managers may hide information from shareholders; hence shareholders need monitor the managers’ effort and actions.

The view proposed by Brealey (2006) that agency problem in corporations are not only principal-agent problems that the financial manager is likely to encounter. For example, shareholders encourage managers to work for the shareholders’ interests; senior managers need to think how to motivate everyone else in the company. Hence senior managers are the principals and junior managers and other employees are the agents. There are various conflicts between managers’ decisions and shareholders’ interests. For example (Boundless), managers may buy other companies to expand power; or venture onto fraud that they may even manipulate financial figures to optimize bonuses and stock-price-related options.

Agency costs are also arose in other areas that as a result are truly effect shareholders maximizing wealth by corporate management. Early contributions by Jensen (1986) at agency theory, the analysis of such agency costs are becoming a major part of problem. Shareholders invest money to company; they expect the money return. The payout of money to shareholders creates major conflicts since that reduce the managers’ power and control. This makes it more likely managers will incur the monitoring of the capital markets which occurs when the firm must obtain new capital (Easterbrook, 1984, and Rozeff, 1982). Financing projects internally avoids this monitoring and intends to reduce the conflicts. Managers have incentives to cause the firms to grow the optimal size and wealth value. Growth increases managers’ power by the increasing resources, hence increases managers’ control.

Although agency costs are happened in many corporations, shareholders can still maximize their wealth by motivating managers to act in shareholders’ best interests. According to Berk (2007), these primary mechanisms...

Other Papers Like Corporate Finance

Introduction to Corporate Finance Essay

1958 words - 8 pages Chapter 1 Introduction to Corporate Finance Week 1 by Hee Soo Lee Learning Goals The basic types of financial management decisions and the role of the financial manager The financial implications of the different forms of business organization The goal of financial management The conflicts of interest that can arise between owners and managers The various types of financial markets      2 Chapter Structure

Corporate Finance Review Outline

923 words - 4 pages efficiency? * Weak form * Security prices reflect all information found in past prices and volume. * Implication? * Semi-strong form * Security prices reflect all publicly available information. * Strong form * Security prices reflect all information—public and private. * What are the implications of market efficiency for corporate finance? * The price of

Iag Corporate Finance Analysis

2346 words - 10 pages IAG INTERNATIONAL AIRLINES GROUP Corporate finance 2013 ------------------------------------------------- Index 1. Company profile 1. Core activities 2. Competitors 3. External finance 1. Corporate governance 4. Corporate governance 5. Compensation of member of the Board of Directors 6. Investor relation section 2. Stock price data and analysis 7. Daily stock prices

Corporate Finance Course Assignment

2280 words - 10 pages The German University in Cairo Corporate Finance Course Assignment submitted by: Mohamed Ibrahim Amin Date: May 24, 2014 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549   FORM 10-Q   (Mark One)   |  | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |   For the quarterly period ended December 31, 2013   |  | TRANSITION REPORT PURSUANT TO

Corporate Finance Case

4887 words - 20 pages financing 10 2.5.1 Tax Advantage 10 2.5.2 Corporate Tax Rate 11 2.5.3 Credit rating 11 2.5.4 Interest rate 11 2.5.5 Company’s Industry 12 2.5.6 Company’s growth rate 12 2.5.7 Some other arguments about Harvey Norman 12 2.6 Evidence of financial distress 13 2.7 Optimal Capital Structure 14 3. Dividend Policy 15 3.1 HVN’s Dividend history 15 3.2 Competitors Dividend Analysis 16

Corporate Finance Assignment

2073 words - 9 pages taxed percentages from the dividends or capital gains. References Myers, S. C. (1984): The capital structure puzzle, The Journal of Finance 39(3), 575-592. Myers, S. C. & Majluf, N. S. (1984): Corporate financing and investment decisions when firms have information that investors do not have The Journal of Financial Economics, 13(2), 187-221

Acf 465-Applied Corporate Finance

3208 words - 13 pages LAHORE UNIVERSITY OF MANAGEMENT SCIENCES Course Outline for APPLIED CORPORATE FINANCE Instructor’s Name: Dr. Naim Sipra Room No. 161 Telephone Ext: 2161 Office Hours for students: Fridays 3-5 pm ________________________________________________________________________ Course Title APPLIED CORPORATE FINANCE Course Code ACF 465 Introduction The objective of this course is to reinforce and expand on

Intro To Corporate Finance Chap. 1

2073 words - 9 pages •Chapter 1 INTRODUCTION TO CORPORATE FINANCE GOAL Today, corporate finance managers must make decision in a much more coordinated manner and generally has direct responsibilities for a control process. Because there are financial implications in virtually all segments of business, she/he must have sufficient knowledge of finance to work these implications into the area. At

International Corporate Finance/Fin Gm571 Week 3

1782 words - 8 pages Lawrence Sports Simulation Team International Corporate Finance/FIN GM571 Alternative Working Capital Policies to Consider The short-term financing strategy Lawrence Sports (LS) is not efficacious. It is in need of improvement and is a problem that LS must consider an alternative working capital policy. The current policy places LS in an overly dependent financial position on the company’s primary customer, Mayo Stores. When Mayo

Corporate Finance

1028 words - 5 pages overhaul of finance. The direction of efforts to improve banks’ liquidity position is to encourage them to hold more deposits; the aim of bail-in legislation planned to come into force by 2018 is to make senior debt absorb losses in the event of a bank failure. The logic behind both of these reform initiatives is that bank deposits have two, contradictory properties. They are both sticky, because they are insured; and they are flighty, because they can

Corporate Finance

552 words - 3 pages MBA 570 Summer 2 Due: August 4, 2012 1) The advantages and disadvantages of short vs long-term mortgage loans can be beneficial differently depending on each individual person and their circumstance. Advantages of long term mortgages include: lower monthly payments and buying power. The longer it takes to pay something off the lower the payments will be less of a strain on the individual. Another advantage to longer-term mortgages is that

Related Essays

Corporate Finance Essay

2784 words - 12 pages CORPORATE GOVERNANCE CHAPTER 1 Presenter's name Presenter's title dd Month yyyy 1. INTRODUCTION WHAT IS CORPORATE GOVERNANCE? • Corporate governance is the system of principles, policies, procedures, and clearly defined responsibilities and accountabilities used by stakeholders to overcome the conflicts of interest inherent in the corporate form. Hence, the importance of understanding the different forms of business. • Corporate

Corporate Finance Essay 1564 Words

1564 words - 7 pages Corporate Finance 10 Problems From Chapter 1 through 10 Sorang Kim BHU MBA 671 Corporate Finace Professor Mensah Dartey April 14, 2013 Chapter 1, Problem 6 (pp. 6 ~ 8) Problem You are a shareholder in a C corporation. The corporation earns $2 per share before taxes. Once it has paid taxes it will distribute the rest of its earnings to you as a dividend. The corporate tax rate is 40% and the personal tax rate on (both dividend and non-dividend

Corporate Finance Essay 1146 Words

1146 words - 5 pages .: Fundamentals Front Matter Preface © The McGraw−Hill of Corporate Finance, Sixth Companies, 2002 Edition, Alternate Edition  COMPREHENSIVE TEACHING AND LEARNING PACKAGE xvi This edition of Fundamentals has more options than ever in terms of the textbook, instructor supplements, student supplements, and multimedia products. Mix and match to create a package that is perfect for your course! Textbook As with the previous edition, we are

Corporate Finance Essay 3390 Words

3390 words - 14 pages , L.J. (2007). Corporate Finance (pp. 250-359). Canada: Thomson South-Western. 4) Grant, T. (n.d). Debt Lender vs. Equity Investor. The Nest. Retrieved from: 5) Howell, R. (n.d). Advantages and disadvantages of Retained Earnings. Chron. Retrieved from: 6) Little, K. (n.d