Page 364 - Corporate Finance PDF Final new link
P. 364
NPP
364 Corporate Finance BRILLIANT’S
The agency theory, considering the eo¶ahmoëS>g© VWm ‘¡ZoO‘|Q> Ho$ ~rM {hVm| Ho$ g§^m{dV
potential conflicts of interest between {ddmX H$m {dMma H$aZo dmbr EO|gr ϶moar H$B© H$maH$m| Ho$
shareholders and management may arise as a n[aUm‘ ñdê$n CËnÝZ hmo gH$Vr h¡, Eogo Hw$N> H$maH$m| ‘|
result of several factors, some of such factors
include: gpå‘{bV h¢…
(i) Reward to management (i) ‘¡ZoO‘|Q> H$mo [admS>©
(ii) Risk attitudes of management and (ii) ‘¡ZoO‘|Q> VWm eo¶ahmoëS>g© Ho$ [añH$ EQ>rQ²>¶yS²>g
shareholders
(iii) Takeover decisions by management (iii) ‘¡ZoO‘|Q> Ûmam Q>oH$Amoda {S>[gO§g
(iv) Time horizon of management (iv) ‘¡ZoO‘|Q> H$m Q>mB‘ hm°[aOmoZ>
Self-Interested Behaviour goë’$-B§Q>aoñQ>oS> {~ho{d¶a
Agency theory suggests that, in imperfect EO|gr ϶moar gwPmd XoVr h¡ {H$ AHw$eb l‘ VWm
labour and capital markets, managers will seek H¡${nQ>b ‘mH}$Q²>g ‘| ‘¡ZoOg© H$m°nm}aoQ> eo¶ahmoëS>g© H$s Anojm
to maximize their own utility at the expense of CZH$s ñd¶§ H$s Cn¶mo{JVm H$mo A{YH$V‘ H$aZo Ho$ {bE
corporate shareholders. à¶mg H$a|Jo&
Agents have the ability to operate in their EO|Q²>g ‘| E{g‘o{Q´>H$ gyMZm (CXmhaU Ho$ {bE,
own self-interest rather than in the best ‘¡ZoOg© eo¶ahmoëS>g© H$s Anojm A{YH$ OmZVo h¢ {H$ ³¶m
interests of the firm because of asymmetric do eo¶ahmoëS>g© Ho$ CÔoí¶ nyao H$aZo ‘| gj‘ h¢) VWm
information (e.g., managers know better than A{ZpíMVVm (CXmhaU Ho$ {bE, ‘m¶aoS> H$maH$ A§{V‘
shareholders whether they are capable of
meeting the shareholder’s objectives) and n[aUm‘m| ‘| ¶moJXmZ XoVo h¢ VWm ¶h à‘mU Zht hmo gH$Vm
uncertainty (e.g., myriad factors contribute to h¡ {H$ ³¶m EO|Q> EH$ {X¶o J¶o n[aUm‘ H$m grYm H$maU
final outcomes, and it may not be evident hmoVo h¢, nm°Or{Q>d ¶m ZoJo{Q>d) Ho$ H$maU g§ñWm Ho$ gdm}Îm‘
whether the agent directly caused a given {hV H$s Anojm ñd¶§ Ho$ {hV ‘| H$m¶© H$aZo H$s ¶mo½¶Vm
outcome, positive or negative). hmoVr h¡&
Evidence of self-interested managerial goë’$ B§Q>aoñQ>oS> ‘¡ZoO[a¶b {~ho{d¶a Ho$ à‘mU nyd©
behaviour includes the consumption of some Amdí¶H$Vm Ho$ ê$n ‘| Hw$N> H$m°nm}aoQ> g§gmYZm| Ho$ Cn¶moJ
corporate resources in the form of perquisites VWm ݶyZV‘ Omo{I‘ pñW{V¶m| go Xÿa ahZm gpå‘{bV
and the avoidance of optimal risk positions, H$aVo h¢ {OgHo$ Ûmam Omo{I‘ go ~MZo dmbo ‘¡ZoOg©
whereby risk-averse managers bypass
profitable opportunities in which the firm's bm^Xm¶H$ Adgam| H$mo N>mo‹S> XoVo h¢ {Og‘| g§ñWm Ho$
shareholders would preferably invest. Outside eo¶ahmoëS>g© CZH$m {Zdoe H$aZm ng§X H$a|Jo& ~mhar
investors recognize that the firm will make {ZdoeH$ nhMmZVo h¢ {H$ g§ñWm CZHo$ gdm}Îm‘ {hV Ho$
decisions contrary to their best interests. {dnarV {ZU©¶ H$aoJr& BgHo$ AZwgma {ZdoeH$ ‘yë¶m| ‘|
Accordingly, investors will discount the prices {S>ñH$mC§Q> H$a|Jo {Ogo do g§ñWm H$s {g³¶mo[aQ>rO Ho$ {bE
they are willing to pay for the firm's securities. ^wJVmZ H$aZo Ho$ BÀNw>H$ h¢&
The interest of shareholders may include: eo¶ahmoëS>g© H$s ê${M gpå‘{bV hmo gH$Vr h¡
Increasing earning per share (EPS), and ~‹T>r hþB© A{ZªJ na eo¶a (EPS) VWm dV©‘mZ eo¶a
current share prices ‘yë¶&
