Discuss the issue below using the textbook and at least three scholarly, peer-reviewed sources as support. Your response to each question should amount to a combined four pages in length. Properly document your sources in APA format using in text-citations for all quoted or paraphrased material. Title and reference pages do not count towards the minimum page requirement.
Use the scenario in this unit's lesson to discuss the following issue:
1. Discuss the implications on the firm of the divergent interests between management and stockholder. How are these implications further complicated by other stakeholders such as vendors, customers, employees, bankers, and the public?
2. How does agency theory affect insider trading activities? Do executives in the firm have any information advantage over outside investors?
DBA 8341, Corporate Finance 4
3. Explain what is meant by the term "agency costs." How do you define agency costs? Provide authoritative support from the literature to support your definition.
4. How are securities markets affected by agency problems? What measures should regulators take to prevent abuses?
5. Consider oftentimes management owning significant percentages of shares in the firm are one and the same as the owners. What problems do management ownership present related to agency problems?
6. What are some strategies found in the literature to counteract agency problems? What are some of the problems associated with each strategy?
7. How is fraud related to agency problems? Where does an agency abuse turn into fraudulent behavior?
8. Explain the impact of agency theory on short- and long-term financial performance.
Here is the unit lesson:
Omnitech is an up and coming high tech startup manufacturer that hired Igor Valuchev
as its chief executive officer. Valuchev came from a high tech background running
another established firm providing value
added technology products to moderate
s. The board of Omnitech believed Valuchev had the right experience to lead
the firm and develop new products.
Despite the fragile startup position of the firm, the board could not attract Valuchev
with salary alone, but could only attract him by offerin
g stock options and a bonus tied
to performance. Valuchev's reputation demanded a fairly hefty salary and perquisite
package. As Valuchev took the reins he pushed the company to achieve a strong
earnings stream and developed a culture stressing the importa
nce of exceeding
company financial benchmarks.
Although the company benefited from this culture by meeting short
term goals, the
company sacrificed future opportunities to expand with related products. Valuchev had
a clause in his contract that if the co
mpany met certain goals he would receive a stock
option award and bonus based on a negotiated schedule.
In the meantime, Valuchev's predecessor firm took advantage of the new
opportunities to expand into the products passed up by Omnitech. The opportunity
turned into a lucrative investment for Valuchev's old firm resulting in returns in excess
of 32%. Valuchev believed it more important first to build a culture of meeting goals
before jumping into new ventures.
Besides his own award of stock options, Val
uchev rewarded the rest of his executive
team with stock options to align key management's goals with those of the
shareholders. Awarding options compensated the key managers by aligning their
performance with the performance of the firm. Since Valuchev be
lieved it did not make
sense to go to the board for each award, he turned the project over to his chief
financial officer. Valuchev discussed what he wanted to do with the board chair. At the
following board meeting, Valuchev and the board chairman togethe
r announced they
had executed the stock awards to the key management group.
Apart from his other responsibilities, Cleat Sure, the chief financial officer, had the
option agreements prepared for the top five key officers. Sure decided to find a date
g the last 90 days where the stock price dipped to its lowest point to date the
option agreements. This strategy almost assured the management team would
receive options in the money at the time of the award
The agency theory
The implications on the firm of the divergent interests between management and stockholders
The managers are given the authority and the rights to make decisions on behalf of the...
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