question archive ABC Ltd, an Australian based firm is a large manufacturing firm with 25 subsidiaries which operates from different parts of the world
ABC Ltd, an Australian based firm is a large manufacturing firm with 25 subsidiaries which operates from different parts of the world
Subject:MarketingPrice:4.88 Bought18
ABC Ltd, an Australian based firm is a large manufacturing firm with 25 subsidiaries which operates from different parts of the world. On 30th July 2018, Birim Equity fund acquired an additional 25% of shares of ABC Ltd resulting in its total shareholding of 48%.
The Herald Sun in its business segment described the acquisition as one which makes Birim Equity a dominant shareholder.
How would this situation affect agency cost for a prospective investor if
a) Birim Equity is separated from management?
b) Birim Equity is not separated from management?
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Costs associated with managing and mitigating the agent-principal problem are known as agency costs. Examples include incentive compensation programs designed to align management behavior with shareholder goals, travel and administrative expense associated with running board meetings, and other governance focused initiatives.
Generally, the closer and more involved the principal is with the business, the lower the agency costs. Conversely, the farther removed and more passive a principal is with the business, the higher the agency costs. Therefore, if Birim Equity is separated from management, its agency costs would be higher. If Birim Equity is not separated from management, its agency costs would be lower.
