Finance - Jensen And Meckling - Finance Assignment Help

Internal Code: I_AH_CFDI_AJD

Finance Assignment Help

TASK 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. Whether an investor has a high, medium or low level of agency cost The type of agency cost likely to be assume an investor The type of corporate governance mechanism which would be appropriate in addressing the type of agency cost