The Impact of Two Agency Problems on the Cost of Capital

The Impact of two agency problems on the live of capital Tung-Hsiao Yang* modern Version: September 10, 2008 * Assistant Professor of Finance, National Chung Hsing University, section of Finance, No. 250, Kuo Kuang Rd., Taichung 40227, Taiwan, tyang1@nchu.edu.tw. The author thanks National Science Council for fiscal support in this project, NSC96-2416-H-005-026. The Impact of two agency problems on the cost of capital Abstract We test the relation between the cost of capital and two agency problems, free cash flows and overinvestment in this paper. The empirical results show that both agency problems have significantly cocksure impact on the cost of capital. In addition, the incentives from stock-based remuneration also have significant positive influence on the cost of capital. After taking the incentives into account, we find that the significance of the positive impact from the agency problems disappears. Therefore, we conclude that the incentive effects harness the agency problems in determining the cost of capital. Well-designed executive allowance can mitigate both agency problems. 1. Introduction The principal-agent race has several potential problems in corporate management that alleged(prenominal) agency problems.

Due to the conflict of interests between shareholders and managers, shareholders need to earnings substantial costs to alleviate these problems, such as observe costs or handsome executive compensation to require out incentives for managers to create firm abide by. In addition, these problems usually result in firm poor performance, either market or account performance. From s fundamental valuation theories, firm market value is affected by the firm free cash s flows and its cost of capital. 1 In this project, we focus on the comeback whether agency problems can affect the firm cost of capital. That is whether m ngr s aae sdecisions could have impact on the firm backing cost. s High corporate cash holdings and... If you want to get a full essay, order it on our website: Ordercustompaper.com

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