ACCA P4考試：Agency Theory and Capital Structure

1 Agency Costs

In many firms there is a "divorce of ownership from control"1473 shareholders (the principals) delegate the running of the firm to the directors (their agents).

This inevitably leads to the risk that the directors will fail to maximise shareholders' wealth. This is known as the "agency problem" and the resulting loss of wealth "agency costs".

Agency costs can be categorised into two main types:

Lost returns due to directors following objectives that fail to align with those of shareholders (e.g. personal objectives such as empire building, or prioritising the objectives of other stakeholders, in particular debt investors).

The costs of monitoring the directors and management (e.g. the costs of internal audit departments and of implementing corporate governance procedures).

2 Impact of Gearing on Agency Costs

Research has found that moderate levels of debt can actually reduce the level of agency costs for the following reasons:

the existence of debt encourages company directors to practice sound financial discipline (e.g. careful cost control);

debt investors, especially banks, implement their own monitoring systems (e.g. requiring regular cash flow forecasts). This reduces the level of monitoring required by the equity investors.

However at high levels of gearing these benefits may become out-weighted by other problems for the equity investors:

increasingly onerous debt covenants restrict the directors' ability to undertake any projects except those of very low risk. This limits potential gains for equity investors.

potential costs of financial distress – if the firm is perceived as being at risk of default then suppliers may refuse credit,

key employees might leave, customers may lose faith in any warranties given on the products, etc. If the firm actually does default it may go through a capital reconstruction (the costs of which would also be borne by the shareholders) or be forced into liquidation (in which case equity investors rank last for repayment of capital).

Therefore there may be an optimal capital structure in terms of minimising agency costs, although research is mixed as to where this optimal point may lie.