The relationship between management and shareholders is sometimes referred to as an Agency Relationship, in which managers act as agents for the shareholders, using delegation powers to run the affairs of the company in the best interest of the shareholders. Since the agent and the manager may have different value of the company to perform agency relationship share prices.When a manager hires an agent to carry out specific tasks, the hiring is be called principal agent relationship, or simply an agency relationship. When a conflict of interest between the needs of the principal and those of the agent arises, the conflict is called an agency problem.In financial markets, agency problems ...view middle of the document...
But management may wish to grow the company in ways that maximize their personal power and wealth that may not be in the best interests of shareholders.Agency costs are inevitable within an organization whenever the principals are not completely in charge; the costs can usually be best spent on providing proper material incentives such as performance bonuses and stock options and moral incentives for agents to properly execute their duties, thereby aligning the interests of principals owners and agents
Bases on this proposes that, although the individual members of the business team act in their own self interest, the well being of each individual depends on the well being of other team members and on the performance of the team in competition with other teams.Another reason why managers might do their best to improve the financial performance of their company is that managers pay is often related to the size or profitability of the company. Managers in very big companies, or in very profitable companies, increase the current share price of £25 per share to a valve higher than the current bidders price of £35 will normally expect to earn higher salaries than managers in smaller or less successful companies.Agency theory suggests that audited accounts of a limited company are an important source of post decision information minimizing investors’ agency costs, in contrast to the alternative approaches which see financial reports as primarily a source of pre decision information for the equity investors.
Part 2 (II)
Working capital policies refer to decisions relating to the level of current assets and the way they are financed . the dual goals of working capital management are liquidity and
profitability. Managing liquidity, costs related to excesses and shortages of working capital, can increase firms‟ profitability.These policies have been divided into one company to another company. working capital financing policies asset management
policy with relative proportions long term and short term finance used by company,when the working capital financing policy uses high level of current liabilities as percentage of total liabilities. It is useful to divide currents assets into permanent current asset fluctuating current assets.
Permanent levels of current assets may have a increase effect on the firm profitability whereas working capital needed to supports the level of sales
The fluctuating component of working capital is used for daily cash flow fluctuations. This short-term requirement is typically financed from a short-term source such as an overdraft facility, which can be drawn on and repaid easily and at short notice.
There are some risk that will come the Short-term debt financing are a type of debt that borrowers must usually pay back within a year or less, which can provide quick access to cash. While short-term payable can help borrowers through periods of low cash...