Agency Costs And Ownership Structure

Jensen and Meckling (1976) refers to the costs that arise due to the use of an agent by a principal in an agency relationship as agency cost. These costs include (1) the costs of opportunistic behaviour by the agent (such as when the agent places his own self-interest over that of the principal’s), (2) the costs to the principal of monitoring the agent; and (3) the “bonding” costs incurred by the agent to induce the principal to rely on it. Nonetheless, the opportunistic behaviour of the agent may work in the favour of principal when the agent contracts with other parties such as debtholder. This phenomenon has been explained as the agency cost of debt (Kim and Sorenson, 1986). Furthermore, Coffee, Jackson, Mitts and Bishop (2018) extend the agency cost argument to the relationship between the different types of shareholders associated with modern corporations. Specifically, Coffee et al., (2018) find that there is the tendency for strong and powerful shareholders to exploit less powerful shareholders. These empirical evidences suggest that any investor may be susceptible to some form of exploitation as result of the agency relationship and its associated agency problem.
Critically examine the following scenarios and state with explanation;

  1. Whether an investor has a high, medium or low level of agency cost
  2. The type of agency cost likely to be assume an investor
  3. The type of corporate governance mechanism which would be appropriate in addressing the type of agency cost
    Note: the following scenarios are independent of each other.

SCENARIO ONE
ABC Ltd, an Australian based firm is a large manufacturing firms with 25 subsidiaries which operates from different parts of the world. On 30th July 2018, Birim Equity fund acquired an additional 25% of shares of ABC Ltd resulting in its total shareholding of 48%. The Herald Sun in its business segment described the acquisition as one which makes Birim Equity a dominant shareholder. How would this situation affect agency cost for prospective investor if
Birim Equity is separated from management
Birim Equity is not separated from management
SCENARIO TWO
Michael Bloomberg, a recent graduate of La Trobe University received $0.5 million cash as his inheritance after the death of his father. Michael has decided to invest his wealth in a listed firm which characterized by many shareholders with each shareholder having a small amount of shares
SCENARIO THREE
Tori, a small-time investor, has decided to invest in Dada PLC. Dada PLC has a large bank loan on its books.
Please use the following papers to critically examine the scenarios:

Sample Solution

Definition Of Family That Encompasses The Different Family Structures

What is a definition of family that encompasses the different family structures prevalent today? Discuss the importance of acknowledging nontraditional family structures. Explain how family systems theory can be used to better understand the interactions of a modern family (traditional or nontraditional).

Sample Solution

The Bureau of Economic Analysis/National Income

Go to the Bureau of Economic Analysis/National Income Accounts site http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm (Links to an external site.). The first thing you will see is the News Release that is reported each month.

Look to the right side of the page for the “Full Release & Tables.” The PDF file is good if you want to print a copy; the full text file is easier to work with online. Scroll down from the news release to find the tables. Take a moment to look at all the tables and the variety of information available.

Using Table 3: “Gross Domestic Product: Level and Change…” answer questions 1 through 8. Show your calculations. Use the Current Dollars section on the left. You’ll note that the annual total is given in the left column, with quarterly breakdowns to the right. You’ll have to scroll down for the second part of the table. (To find the % that any value is of GDP divide that value by GDP and multiply by 100. For instance, if PCE is 8,000 and GDP is 10,000, than PCE is 8/10 x100 or 80% of GDP. Be sure to ask if you have questions about these calculations)

What is the release date of the report you are using?
What was the current dollar value of GDP for last year?
What was the current dollar value of personal consumption last year?
What percentage of GDP was Personal Consumption Expenditure (PCE) last year?
What percentage of GDP was Gross Private Domestic Investment last year?
What percentage of GDP was government spending (Government Consumption Expenditures and Gross Investment) last year?
What percentage of GDP was Net Exports last year?
What is the sum of these percentages? Do you think that is correct? Why? Do any of these percentages surprise you? Which ones?

Sample Solution

Theories in economics

Some theories in economics posit that poverty and inequality exist because of kinds of relationships between different groups in the economy (for example, the relationship between workers and capitalists, or the relationship between the Global North and the Global South). Other theories posit that poverty and plenty (and hence, inequality) don’t come from relationships between groups, but from the actions or circumstances of those who are poor and those who have plenty (i.e. savings and growth, industrial policy, geography). Describe in detail two distinct theories or mechanisms from each group, for four in total. Conclude with your own evaluation of these theories: how well do they explain the various dimensions of poverty and inequality in the world?

Sample Solution

The Ten Basic Principles of Economics

Choose an article published in the last two weeks in one of these three resources (Wall Street Journal, Business Week, Economist). Discuss how the article relates to one or more of the Ten Basic Principles of Economics:

People Face Trade-offs
The Cost of Something Is What You Give Up to Get it
Rational People Think at the margin
People Respond to Incentives
Trade Can Make Everyone Better Off
Markets Are Usually a Good Way to Organize Economic Activity
Governments Can Sometimes Improve Market Outcomes
A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services
Prices Rise When the Government Prints Too Much Money
Society Faces a Short-Run Trade-off between Inflation and Unemployment

Sample Solution

Public Good

Select a familiar or local Common Resource or Public Good within the last 3 years.

Assess the existence of free riders, externalities, cost-benefit analysis, the likelihood of a “Tragedy of the Commons” issue, etc.
Evaluate the controls currently in place to protect or maintain the resource/good
Discuss the sustainability or need for a change of the current status.

Sample Solution

A price ceiling

In some cases, the government can intervene in the market when the equilibrium price is too high or low. For example, a price ceiling is a legal maximum price that can be charged in a particular market. Do some research on your own. Here are some sites to help you get started: What Happens to the Equilibrium Price When Quantity of Supply & demand Shifts Upward?

Sample Solution