Essay - Corporate Finance: Agency Theory Dq1 from Your Readings in Agency...

Corporate Finance: Agency Theory

DQ1

From your readings in Agency Conflicts, and your personal experience, mention some areas of conflict between shareholders ***** management, and how can they be solved?

The day-to-day running of a company is the responsibility ***** ***** management, not the ***** who are ***** owners of the company in name. Shareholders make a profit when the ***** financially *****s, while management without the incentive of stock options, as employees of the shareholders, may have more ***** an incentive to pad their paychecks. However, by and large managers will do their best to improve the financial performance of ********** company because managers' pay and job security is often related to the profitability and success of ***** company. ("Session 3: ***** Relation, Chapter: 10: Basic Financial Management, Transport ***** Analys*****, Retrieved ***** Jan 2006 at (http://cbdd.wsu.edu/kewlcontent/cdoutput/TOM505/page31.htm)

DQ2

***** are some possible *****s ***** interest between ***** and bondholders? How can ***** be avoided?

Bondholders lend money to the company at interest, r*****her than act as partial owners, like shareholders. They thus tend to be more risk adverse than shareholders, ***** might hope to ***** a quick profit off of a spike in ***** price, after a large merger. "A shareholder ***** spread his risk by investing his money in a num*****r of companies; one company may go into liquidation but the shareholders' financial security is not threatened." ("Session 3: Agency Relation, Chapter: 10: Basic Financial Management, Transport Financial *****is, Retrieved 3 Jan ***** at (http://cbdd.wsu.edu/kewlcontent/cdoutput/TOM505/page31.htm)A bondholder ***** want to make sure th***** *****e company stays solvent and has enough ***** to ***** back the bond at ***** end of the bond's term, ***** a shareholder might look more favorably upon a risky technological investment that could pay high dividends in corporate success ***** ***** future.

DQ3

What does agency theory tells us about *****ing executive stock options, and incentive plans in general, about creating conflict of interest for managers ***** under what circumstances would you recommend using them in a compens*****tion program?

On one hand, executive ***** options give managers an incentive to ***** sure that the ***** performers well. On the other hand, these options ***** encourage ***** to go for short-***** rewards, rather than seek ***** build corporate infrastructure like technology or expansion abroad ***** may only pay *****f for the company after several years. There ***** be ethical temptations to misrepresent ***** profits, to encourage a spike in stock price. Usually it is suggested that such a compens*****tion ***** is best deployed early on in a corporation's history, "his when a public company goes public and managers are ********** to subscribe ***** shares in the ***** at an *****tr*****ive offer price. Managers will ***** a stake in ***** bus*****ess and will venture only ***** those projects which enhance the share value of the business." At t***** juncture, it is necessary ***** managers are forward thinking, and there ***** fewer opportunities to artificially inflate the s*****ck price, and then rapidly sell off the shares for a