1.1 Introduction Capital structure theory studies firm’s financing structure and the factors influencing capital structure. Bulk literature focus on trade-off and pecking order theory to explain firm’s debt financing decisions. These studies have already identified certain key determinants of capital structure, such as firm size, growth opportunity, profitability and tangible assets, etc. Other than these common determinants, agency theory as proposed by Jensen & Meckling (1976) argues that, agency cost arising from the conflicts of interests between managers and shareholders also influence firm’s capital structure. Regarding to the well research of other two capital structure theories, this study mainly focus on agency theory and try to find …show more content…
The separation of ownership and control gives management powers to purse private benefits with the expense of shareholders, which increases agency costs and decreases economic efficiency. Corporate governance has been an important element for managing corporate operation and improving economic efficiency. John and state that corporate governance is effective control mechanism through which firm’s stakeholders could exercise control over corporate insiders and management to protect their interests. Firm’s stakeholders include shareholders and creditors, as well as other stakeholders like employees and …show more content…
Internal controls aim to mitigate the conflicts between shareholders, managers, board of directors and other stakeholders through surveillance and control of management, which is under control of managers and shareholders within the corporation. Among the internal governance mechanisms, ownership structure is crucial. Shareholders exert influence on managers to reduce agency conflicts by managing ownership structure (Bai, et al., 2004). External corporate governance mechanisms focus on disciplining and monitoring roles outside of the firm, such as market for corporate control (Ehikioya, 2008). The most common ways to organize a business are, sole proprietorship and partnership. A sole proprietorship is a one-person business that is not registered with the state like a limited liability company (LLC) or corporation. Others involve, Limited partnerships, Limited Liability Company (LLC) Corporation (for profit) Nonprofit Corporation (not For profit) Cooperative. 1.5 Resume of Succeeding
Every business can operate because of five essential parts; Product creation, Marketing, Sales, Finance, and Delivery of your Product. Throughout this essay we will be juxtaposing the different aspects of the parts above and showing how each of them relate to capitalism and communism and how each of the essential parts can be shown differently through both capitalism and communism. Business varies extremely when in different environments and these two environments are drastically different and the most different environments that are possible. This essay will help understand how drastic the differences really are between the two markets.
Based on the Consolidated Statements of Shareholder?s Equity, year ended September 2015, in page 71, as shown in the statement, there are no preferred stocks.
There is no universal theory of the debt-equity choice, and no reason to expect one. In this essay I will critically assess the Pecking Order Theory of capital structure with reference and comparison of publicly listed companies. The pecking order theory says that the firm will borrow, rather than issuing equity, when internal cash flow is not sufficient to fund capital expenditures. This theory explains why firms prefer internal rather than external financing which is due to adverse selection, asymmetry of information, and agency costs (Frank & Goyal, 2003). The trade-off theory comes from the pecking order theory it is an unintentional outcome of companies following the pecking-order theory. This explains that firms strive to achieve an optimal capital structure by using a mixture debt and equity known to act as an advantage leverage. Modigliani and Miller (1958) showed that the decisions firms make when choosing between debt and equity financing has no material effects on the value of the firm or on the cost or availability of capital. They assumed perfect and frictionless capital markets, in which financial innovation would quickly extinguish any deviation from their predicted equilibrium.
6. Capital structure and the discount rate 6.1. Features of debt and equity financing Financing through equity or debt has advantages and disadvantages as follows: Equity is more flexible for the company, since in a situation of lack of liquidity shareholders return could be delay or stopped, while debt interest always have to be paid (Atrill and McLaney, 2015). Debt is faster to obtain than a securities issue (Atrill and McLaney, 2015). Related to control, a debt does not provide lenders control over company´s operations and management decisions, except some previous agreements with lenders about limiting future borrowings, sale of assets and pay of dividends.
Assessing the capital structure of any firm is important for investors attempting to determine if...
The market value is not affected by the firm’s capital structure, that’s what the M&M first proposition stated; in proposition one it is stated that under certain conditions the firm’s debt equity has got no effect on the firm’s market value. This approach is based on the below:
In the corporate form of business, the primary goal should be to maximize long-term value and owners’ value, or shareholder wealth maximization (Brigham, & Houston, 2011). The problem is that managers, who are supposed to make the decisions that would best serve the corporation, are naturally motivated by self-interest, and the managers’ own best interests may differ from the principal's or stakeholders best interests. An agency problem that exits in the corporate form of business is the conflict of interest between the company's management, and the company's stockholders. The relationship between the stockholders and corporate management is often based upon those conflicting interests that arise from a separation of ownership and control, differing management and stockholder objectives, and an information asymmetry that exists between the two groups (Fama & Jensen, 1983).
Corporate governance implies governing a company/organization by a set of rules, principles, systems and processes. It guides the company about how to achieve its vision in a way that benefits the company and provides long-term benefits to its stakeholders. In the corporate business context, stake-holders comprise board of directors, management, employees and with the rising awareness about Corporate Social Responsibility; it includes shareholders and society as well. The principles which...
Finding the perfect capital structure in terms of risk and reward can ensure a company meets shareholder expectations and protects a firm in times of recession. Capital structure refers to how a business puts its money to “work”. The two forms of capital structure are equity capital and debt capital. Both have their benefits and limitations. Striking that perfect balance between the two can mean the difference between thriving versus trying to survive.
Jensen, M.C and Meckling, W.H (1976). Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics, October, 1976, V. 3, No. 4, pp. 305-360. Available on: http://www.sfu.ca/~wainwrig/Econ400/jensen-meckling.pdf. [Accessed on 20th April 2014].
Corporate governance is broad term used to refer to the different policies and regulations that a company follows to ensure that the interest of investors, employees, customers and suppliers are maintained. It is meant to ensure there is no corruption, profit loss, and that the company is protected from any legal issues. A company can use one of several governance theories as a model to run successfully. Agency Theory and Stewardship Theory are two of the several theories used by companies. Agency Theory believes that shareholders interest requires separation of CEO and board of directors for a checks and balances effect. Stewardship theory believes that leaders have aligned goals and will work together
Nottingham Trent University. (2013). Lecture 1 - An Introduction to Corporate Governance. Available: https://now.ntu.ac.uk/d2l/le/content/248250/viewContent/1053845/View. Last accessed 16th Dec 2013.
The capital structure of a firm is the way in which it decides to finance its operations from various funds, comprising debt, such as bonds and outstanding loans, and equity, including stock and retained earnings. In the long term, firms seek to find the optimal debt-equity ratio. This essay will explore the advantages and disadvantages of different capital structure mixes, and consider whether this has any relevance to firm value in theory and in reality.
The office of the Director of Corporate Enforcement (ODCE, 2015), Ireland defines Corporate Governance as “the system, principles and process by which organisations are directed and controlled. The principles underlying corporate governance are based on conducting the business with integrity and fairness, being transparent with regard to all transactions, making all the necessary disclosures and decisions and complying with all the laws of the land”. It is the system for protecting and advancing the shareholder’s interest by setting strategic direction for the firm and achieving them by electing and monitoring the capable management (Solomon, 2010). It is the process of protecting the stakes of various parties that have their interest attached with a company (Fernando, 2009). Corporate governance is the procedure through which the management of the company is achieving the goals of various stake holders (Becht, Macro, Patrick and Alisa,
...eve efficient resource allocation. Failure to achieve appropriate and efficient corporate governance could result in sub-optimal allocation of resources, abuses and theft by management, expropriation of outside shareholders and creditors, financial distress and even bankruptcy. While evaluating the role of corporate governance, it is imperative to also consider the levels of development of market institutions and other legal infrastructure including laws and enforcement that provide good standard for investor protection as well as ownership structures.