Conflict of interest between managers (increase firm size) and SH (increase firm wealth)
1 of 8
Free cash flow
Operating business cash leftover after investing in all +ve NPV projects
2 of 8
Agency cost associated with free cash flow: Issues
1) Asymmetric info (managers know more than SH) 2) Moral hazard (managers was to optimise own profits) 3) Managers waste free cash on -ve NPV projects/ wages/ hiring to achieve excess growth (instead of dividend payouts)
3 of 8
Agency cost associated with free cash flow: Solutions
1) Debt issue for share repurchase (disciplines managers as DH have claims) 2) Corporate governance controlling mechanisms (pay schemes/ monitoring/ threat of dismissal)
4 of 8
Agency cost associated with free cash flow: Industry issue
Large issue in firms with lots of cash with little growth projects (e.g. oil anticipation of price rises, when there was actual price fall with real IR increasing)
5 of 8
Bargaining power of managers with employees: issue
Firms with more variable profits (more chance of excess liquidity) and unionised labour exert more rent-seeking behaviour
6 of 8
Bargaining power of managers with employees: solution
1) Debt issue for share repurchase (disciplines managers to make payments to DH and not to unions)
7 of 8
Trade-off with increasing debt
Disciplines managers Vs Costs of financial distress
8 of 8
Other cards in this set
Card 2
Front
Free cash flow
Back
Operating business cash leftover after investing in all +ve NPV projects
Card 3
Front
Agency cost associated with free cash flow: Issues
Back
Card 4
Front
Agency cost associated with free cash flow: Solutions
Back
Card 5
Front
Agency cost associated with free cash flow: Industry issue
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