Stockholders and creditors agency relationship


stockholders and creditors agency relationship

Agency problem is the conflict of interest between the shareholders and managers, and shareholders and creditors. It may cause difficulty in. Agency Problem with Shareholders and Creditors Agency Problem: The conflict of interest between the shareholders and managers, and shareholders and. 8 1 APU University TP Question 1 Agency Relationship in Hence, as agents represent both shareholders and creditors, managers must treat the.

While the shareholders wish to maximize shareholder value. Thus, managers may have the motive to make decision that are not in the best interest of the 2 APU University TP shareholders. Because managers usually will be having the small interest in most large corporations, so this might arise some of the following conflicts: With its balance sheet, rosier than what it actually is.

Agency Problem between Shareholders and Creditors | Corporate Financial Management

This is known as window dressing. It is made possible by the open-ended nature of the choice of accounting policies might need to defer specific type of expenditure as such advertising and capitalise it or put value on intangible as patents. Typical examples of such practices are the degradation of the environment over pollution and testing of products on human beings.

The might thereof, use a payback technique rather than the superior net present value. Compensation should be linked to the managers' performance, through annual performance bonuses and long-term stock options.

stockholders and creditors agency relationship

To stimulate managers to pay attention on maximizing stock prices, companies often award stocks to managers due to: Management is given an option to buy stock at a stated price within an identified time period. Management receives a specific number of shares if the company reaches predefined performance benchmarks. Creditors Vs Managers The second most severe conflicts of interest that might exist in the company, as Managers are the agent of both creditors and shareholders.

stockholders and creditors agency relationship

Creditors authorise managers to use the loan. Shareholders authorise managers to manage the entity. Being employed by the entity, managers are more likely to act in the best interest of shareholders side, not creditors. Ultimately, when there is increases in debt, directly it will lead to increases in risk, particularly bankruptcy risk. Jerzemowska, Furthermore, managers, who are obliged to maximize the interests of shareholders, may perhaps make decisions that are associated with the interests of bondholders.

Here the owners are the principals and the managers are the agents.

Conflict Between Shareholders and Creditors - ORDNUR TEXTILE AND FINANCE

Most managers are paid fixed salaries irrespective of profit made during the year. Shareholders prefer high risk high return investments since they may have diversified investment portfolios.

The managers prefer low risk investments which have low returns. This, the profit generated by the company reflects the managers performance. High risk investment gone bad can lead to managers loss of job hence preference to low risk low returns investments.

This involves manipulation of accounting policies in order to report high profits e. It may be referred as empire building through so as to enlarge the company through mergers and acquisitions thus increasing rewards to managers.

This might be beneficial to managers at the expense of shareholders. Solutions to these problems: If managers are not performing, they can be threatened with firing during the annual general meeting or even appointing other managers. Shareholders can threaten to sell the company to another company.

Conflict Between Shareholders and Creditors

The second agency problem involves the conflict between, on one hand, owners who possess the majority or controlling interest in the firm and, on the other hand, the minority or non-controlling owners.

Here the non-controlling owners can be thought of as the principals and the controlling owners as the agents, and the difficulty lies in assuring that the former are not expropriated by the latter. Thus if minority shareholders enjoy veto rights in relation to particular decisions, it can give rise to a species of this second agency problem. Similar problems can arise between ordinary and preference shareholders, and between senior and junior creditors in bankruptcy when creditors are the effective owners of the firm.

Episode 150: Social Responsibility Perspectives: The Shareholder and Stakeholder Approach

The third agency problem involves the conflict between the firm itself—including, particularly, its owners—and the other parties with whom the firm contracts, such as creditors, employees, government and customers.

Here the difficulty lies in assuring that the firm, as agent, does not behave opportunistically toward these various other principals—such as by expropriating creditors, exploiting workers, or misleading consumers.