Week 5 Agency Costs

Question 1

What are examples of principles & agents?

Answer 1

1) Owners & Management
2) Owners & Employees
3) Debt & Equity Holders
4) Lawyer & Clients
5) Physician & Client
6) Mortgage Broker & Home Buyers

Question 2

What is the role of managers when it comes to shareholders?

Answer 2

The role of managers is to maximise shareholder wealth. However, in certain position acting in the best interest of shareholders might lose them business.

Question 3

What are some ways to minimise agency costs?

Answer 3

1) Align the interest of the principles with the agent.
2) Contract Design & Monitoring
3) Perfomance based compensation

Question 4

What are direct & in-direct costs?

Answer 4

Indirect: Opportunities that might be left of the table as risks is too high.

Direct: Expenditures that directy benefit managers but not shareholders. E.g. New Office Space

Question 5

Why is Debt considered to be an agency cost?

Answer 5

Debt repayments are a cost whihc restrict ability to spend on perks.

Is a method of signalling as weaker firms will not be able to replicate.

Question 6

What are 3 types of signalling?

Answer 6

1) Financing of capital project
2) Share buyback
3) Dividend changes

Question 7

Why do companies increase dividends?

Answer 7

Increasing dividend is a method for companies to raise their share price without organic growth.