This paper aims to study how agency relationships and ownership structures influence capital structure decisions. It discusses how managers' decisions may diverge from owners' interests depending on whether the manager also owns the company or it has diffuse ownership. It focuses on whether agency relationships impact capital structure and who makes optimal decisions about cost of debt versus equity. The paper analyzes how separation of ownership and control influences who makes capital structure choices and how ownership structure and company policies affect these decisions. It also discusses conflicts between equity and debt holders that may influence investment, financing and dividend payout strategies.
A synopsis of agency problems that exist in a firm setting and the legal strategies utilized to balance the shifting power of the principal/agent relationship in the firm setting
A synopsis of agency problems that exist in a firm setting and the legal strategies utilized to balance the shifting power of the principal/agent relationship in the firm setting
1. Agency Problem
Definition: A conflict arising when people. (The agents) entrusted to look after the interests of others (the principals) use the authority or power for their own benefit instead.
2. Agency problems arise in a variety of different contexts.
Example:
• A lawyer is meant to act in the best interest of his or her client.
• Managers act on behalf of shareholders.
• Employees work for their employers.
• Politicians represent their voters and so on
3. Explanation: The problem is that the agent who is supposed to make the decisions that would best serve the principal is naturally motivated by self interest, and the agent's own best interests may differ from the principal's best interests.
4. Solving Agency Problem
• The manager can be motivated to act in the shareholders' best interests through incentives, Such as:
• Performance-based compensation.
• Direct influence by shareholders.
• The threat of firing.
• The threat of takeovers.
Thank you all of you..
In case of business, Corporate Governance is a new era. It has potential scope to find it useful though it hasn't actually been evolved from one theory. Many theories from different disciplinary area contributed to develop fundamental of corporate governance.
Presentation provides an overview of the theoretical concepts in corporate governance, few definitions, methods to measure it and a brief overview of recent developments in corporate governance in the Caribbean.
This research investigates the determinants of the capital structure of firms listed service sector on BIST(Borsa Istanbul) and the adjustment process towards this target. The econometric analysis employs the Generalized Method of Moments estimators (GMM-Sys, GMM difference) techniques that controls for unobserved firm-specific effects and the endogeneity problem. The findings of the paper suggest that firms have target leverage ratios and they adjust to them relatively fast. Consistent with the predictions of capital structure theories and the findings of the empirical literature, the results of this paper suggest that size, assets tangibility, profitability, growth opportunity except earnings volatility have significant effects on the capital structure choice of hotels and restaurants.The capital structure or leverage is measured by total debt ratio. Analysis results indicates that firms with high profits, sizable, high fixed assets ratio and high total sales and more growth opportunities tend to have relatively less debt in their capital structures.
This case examines seven commonly accepted myths about corporate governance. How can we expect managerial behavior and firm performance to improve, if practitioners continue to rely on myths rather than facts to guide their decisions?
Authors: Professor David F. Larcker and Brian Tayan, Researcher, Corporate Governance Research Initiative, Stanford Graduate School of Business
Other organizational structures exist besides public corporations. Examples include family-controlled businesses, venture-backed companies, private equity-owned businesses, and nonprofit organizations. Each of these faces their own issues relating to purpose, ownership, and control.
This Quick Guide reviews the governance features adopted by these entities.
It provides answers to the questions:
• What are the purposes of these organizations?
• What governance solutions do they adopt?
• How effective are they in meeting their objectives?
For an expanded discussion, see Corporate Governance Matters: A Closer Look at Organizational Choices and Their Consequences (Second Edition) by David Larcker and Brian Tayan (2015): http://www.gsb.stanford.edu/faculty-research/books/corporate-governance-matters-closer-look-organizational-choices
Buy This Book: http://www.ftpress.com/store/corporate-governance-matters-a-closer-look-at-organizational-9780134031569
For permissions to use this material, please contact: E: corpgovernance@gsb.stanford.edu
Copyright 2015 by David F. Larcker and Brian Tayan. All rights reserved.
1. Agency Problem
Definition: A conflict arising when people. (The agents) entrusted to look after the interests of others (the principals) use the authority or power for their own benefit instead.
2. Agency problems arise in a variety of different contexts.
Example:
• A lawyer is meant to act in the best interest of his or her client.
• Managers act on behalf of shareholders.
• Employees work for their employers.
• Politicians represent their voters and so on
3. Explanation: The problem is that the agent who is supposed to make the decisions that would best serve the principal is naturally motivated by self interest, and the agent's own best interests may differ from the principal's best interests.
4. Solving Agency Problem
• The manager can be motivated to act in the shareholders' best interests through incentives, Such as:
• Performance-based compensation.
• Direct influence by shareholders.
• The threat of firing.
• The threat of takeovers.
Thank you all of you..
In case of business, Corporate Governance is a new era. It has potential scope to find it useful though it hasn't actually been evolved from one theory. Many theories from different disciplinary area contributed to develop fundamental of corporate governance.
Presentation provides an overview of the theoretical concepts in corporate governance, few definitions, methods to measure it and a brief overview of recent developments in corporate governance in the Caribbean.
This research investigates the determinants of the capital structure of firms listed service sector on BIST(Borsa Istanbul) and the adjustment process towards this target. The econometric analysis employs the Generalized Method of Moments estimators (GMM-Sys, GMM difference) techniques that controls for unobserved firm-specific effects and the endogeneity problem. The findings of the paper suggest that firms have target leverage ratios and they adjust to them relatively fast. Consistent with the predictions of capital structure theories and the findings of the empirical literature, the results of this paper suggest that size, assets tangibility, profitability, growth opportunity except earnings volatility have significant effects on the capital structure choice of hotels and restaurants.The capital structure or leverage is measured by total debt ratio. Analysis results indicates that firms with high profits, sizable, high fixed assets ratio and high total sales and more growth opportunities tend to have relatively less debt in their capital structures.
This case examines seven commonly accepted myths about corporate governance. How can we expect managerial behavior and firm performance to improve, if practitioners continue to rely on myths rather than facts to guide their decisions?
Authors: Professor David F. Larcker and Brian Tayan, Researcher, Corporate Governance Research Initiative, Stanford Graduate School of Business
Other organizational structures exist besides public corporations. Examples include family-controlled businesses, venture-backed companies, private equity-owned businesses, and nonprofit organizations. Each of these faces their own issues relating to purpose, ownership, and control.
This Quick Guide reviews the governance features adopted by these entities.
It provides answers to the questions:
• What are the purposes of these organizations?
• What governance solutions do they adopt?
• How effective are they in meeting their objectives?
For an expanded discussion, see Corporate Governance Matters: A Closer Look at Organizational Choices and Their Consequences (Second Edition) by David Larcker and Brian Tayan (2015): http://www.gsb.stanford.edu/faculty-research/books/corporate-governance-matters-closer-look-organizational-choices
Buy This Book: http://www.ftpress.com/store/corporate-governance-matters-a-closer-look-at-organizational-9780134031569
For permissions to use this material, please contact: E: corpgovernance@gsb.stanford.edu
Copyright 2015 by David F. Larcker and Brian Tayan. All rights reserved.
Impact of Firm Specific Factors on Capital Structure Decision: An Empirical S...Waqas Tariq
Abstract This study attempts to explore the impact of firm specific factors on capital structure decision for a sample of 39-firm listed on Dhaka Stock Exchange (DSE) during 2003-2007. To achieve the objectives, this study tests a null hypothesis that none of the firm’s specific factors namely profitability, tangibility, non-debt tax shield, growth opportunities, liquidity, earnings volatility, size, dividend payment, managerial ownership, and industry classification has significant impact on leverage using estimate of fixed effect model under Ordinary Least Square (OLS) regression. Checking multicollinearity and estimating regression analysis through Pearson correlation and autoregressive mode respectively this study found that profitability, tangibility, liquidity, and managerial ownership have significant and negative impact on leverage. Positive and significant impact of growth opportunity and non-debt tax shield on leverage has been found in this study. On the other hand size, earnings volatility, and dividend payment were not found to be significant explanatory variables of leverage. Results also reveal that total debt to total assets ratios are significantly different across Bangladeshi industries. Keywords: Capital structure, Leverage, Firm’s specific factors, Dhaka Stock Exchange Bangladesh.
The Impact of Capital Structure on the Performance of Industrial Commodity an...IJEAB
This paper investigates the impact of capital structure on the performance of commodity and service firms listed on the Vietnamese Stock Exchange. Data used in the paper were collected from the 142 firms listed on Ho Chi Minh and Ha Noi Stock Exchange during time 2009-2015. By using the descriptive statistics and linear regression model, the findings shows that there is negative relationship between capital structure (e.i. STD. LTD and DA) and peformance of the firms (i.e. ROE) for the commodity and services firms listed on two given Stock Exchange Market of Vietnam. Following are possible implications for the study.
This paper scrutinizes Determinants of Capital Structure: A study on some selected corporate firms in Bangladesh. We have taken 10 out of 37 listed companies of DSE dividing into two sectors i.e. Pharmaceuticals and chemicals and Tannery sector, five years data from 2013 to 2017 has been collected from respective annual reports. Total number of observations was 50. There are different factors that affect a firm's capital structure decision. We use leverage (D/E ratio) as dependent variable and independent variables are profitability, tangibility, tax, size, growth, non-debt tax shield (NDTS) and financial costs. By using Descriptive Statistical Analysis, Correlation Analysis and Regression Analysis tools we find that Tangibility, size, NDTS, and financial costs are positively related with leverage and Profitability, tax, and growth are negatively related with leverage. In our analysis we see profitability, tangibility of asset, growth and non-debt tax shield have significant association. So when we take capital structure decision of the above firms we should consider profitability, tangibility of asset, growth and non-debt tax shield because other independent variables are insignificant in the context of Bangladesh economy.
International Journal of Business and Management Invention (IJBMI)inventionjournals
International Journal of Business and Management Invention (IJBMI) is an international journal intended for professionals and researchers in all fields of Business and Management. IJBMI publishes research articles and reviews within the whole field Business and Management, new teaching methods, assessment, validation and the impact of new technologies and it will continue to provide information on the latest trends and developments in this ever-expanding subject. The publications of papers are selected through double peer reviewed to ensure originality, relevance, and readability. The articles published in our journal can be accessed online.
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The impact of agency theory on capital structure a descriptive study
1. THE IMPACT OF AGENCY THEORY ON CAPITAL STRUCTURE: A DESCRIPTIVE
STUDY
ABSTRACT
This paper aims to provide descriptive study on how agency relationship and ownership structure
influences financing decision making as it relates to the capital structure of a firm.
INTRODUCTION
Jensen and meckling (1976) uses agent/principal relationship in relation to agency cost to
determine decision making as it relates to ownership structure of a firm. He proposes that the level
of utility in relation to financing, investment and operating decision making is dependent on the
ownership structure of the firm. In owner manger wholly owned structure situation, such manager
will want to make decision to satisfy his utility first at the detriment of the overall objectives the
firm since he is representing both the agent and principal while in a diffuse owned structure,
satisfaction of utility and execution of responsibilities by the manager is dependent on the contract
terms and benefits (pecuniary and non-pecuniary benefits) . Ang et al. (2000), and Fleming et al.
(2005), shows that agency costs generated from the conflicts between outside equity holders and
owner-manager could be reduced by increasing the owner-managers’ proportion in equity, i.e.,
agency costs vary inversely with the manager’s ownership. Capital structure (leverage) for the
firms is determined by agency costs, i.e., costs related to conflict of interests between various
groups including managers, which have claims on the firm’s resources (Harris and Raviv, 1991).
Hence, execution of the firm’s objectives in an owner’s manager wholly owned structure differs
from diffused equity ownership and debt ownership structure. This execution of firm’s objectives
necessitated the creation of agency cost used in monitoring how the manager’s (agent) interests
will not be in divergence from the owners (principal) interests. Jensen (1976) opines both the
principal (monitoring cost) and agent (bonding cost) expend agency cost as it relates execution of
the firm objectives while the principal (firm) bear the residual loss cost for divergence of the firm’s
objectives by the agent.
2. The main purpose of this paper is to provide some descriptive evidence on the impact of agency
theory on capital structure. We shall focus on two questions:
Does agency relationship have impact on capital structure decision making?
Who makes optimal decision as regards cost of debt and cost of equity in capital mix
decision making?
Jensen (1976) identified two major problems that arises from agency relationship: separation of
ownership and control, inducement of agents to carry on business activities as if he is pursuing
firms’ objectives. The separation of ownership and control led to who makes critical decision as
regards the capital mix of the firm. Decision making as regards Capital structure of a firm is
dependent on the ownership structure and the policy of the firm. The optimal performance of an
agent as regards cost of equity decision making is not the same as cost debt. In an equity or owner
manager ownership structure, the principal monitoring cost is lower compare to mix of equity and
debt ownership structure because if the agent is given free hand to make decision in an equity/debt
ownership structure, such manager will want to increase the debt structure of the firm because the
cost of debt is lower and easier than cost of equity , however, when debt rises to a certain stage, it
will threaten the continue existence of the firm which might lead to bankruptcy and reorganization.
According to M&M (1958), he opines that capital mix of a firm is irrelevant to the valuation of a
firm and what is important is the cashflow from the operating activities of the firm while
Durand(1952) believes increase in debt ratio increases the capital structure which in turn makes
the firm to achieve lower cost of capital.
Equity holders have a residual claim on cash flows. What they care about are profits and earnings
from the projects they invest on. They may accept any projects which will increase firm’s value
no matter how risky they are. However, debt holders do not only share profits and earnings with
equity holders, but also have a fixed claim on cash flows, which is the interest of debt. Therefore,
what they focus on is the security of their claims. This conflict between equity holders and debt
holders may affect a firm’s decisions on three dimensions: investment, financing strategy and
dividend distribution.
3. REFERENCES
Ang, J.S.; R.A. Cole and Lin, J.W., (2000). Agency costs and ownership structure, Journal of
Finance, 5, pp81-106
Fleming, G., Heaney, R,. and McCosker, R. (2005). Agency costs and ownership structure in
Australia, Pacific-Basin Finance Journal, 13, pp29-52.
Jensen, M. and Meckling, W. (1976). A Summary Of Theory Of Firm: Managerial Behavior, Agency
Costs And Ownership Structure