Agency Costs - E-Commerce - Lecture Slides, Slides of Fundamentals of E-Commerce

Download Agency Costs - E-Commerce - Lecture Slides and more Slides Fundamentals of E-Commerce in PDF only on Docsity! Agency Costs & Shareholders • Investing in high risk/high return projects can shift wealth from bondholders to shareholders • Shareholders may forgo some profitable investments in debt is required • Shareholders may issue high quantities of new debt, diminishing the protection afforded to earlier bondholders • Bondholders will shift monitoring and bonding costs back to the shareholders by charging Docsity.com Taxes, Bankruptcy and Agency Costs • Bankrupcty and agency costs increase with the amount of leverage • At some point, these offset the positive benefits from the value of the tax shield Market value of unlevered firm + PV of tax shield – PV of bankruptcy costs – PV of agency costs Market value of leverage firm Docsity.com Other Considerations • Personal tax costs (interest is fully taxable) – Could offset some corporate tax advantages – No optimal capital structure when both corporate & personal taxes are considered • Industry effects – Firms with stable cash flows tend to have higher debt ratios – More profitable firms tend to have lower debt ratios – Market appears to reward firms with capital structures appropriate to their industry Docsity.com Other Considerations • Signaling effects (Asymmetric Information) – Firm management have access to confidential information – Management decisions may be a signal to the market • Managerial preferences (Pecking order theory) – Firms prefer internal to external financing • New issues incur flotation costs • External financing incurs more monitoring by the market Docsity.com Pecking Order Theory • Firms have a definite preference in the order in which they finance new projects Internal Equity Debt External Equity Most Preferred Least Preferred Docsity.com