Table of Contents
- 1 Why might conflicts arise between stockholders and bondholders?
- 2 What is the difference between a shareholder and a debtholder?
- 3 What is a conflict of interest between stakeholders?
- 4 How can bondholders protect themselves from managers action that negatively impact bondholders?
- 5 What is the conflict between shareholder and creditor?
- 6 Why do private firms with majority control have shareholder conflicts?
Why might conflicts arise between stockholders and bondholders?
Sources of conflict include dividends, distortion of investment, and underinvestment. Protective covenants in bond documents work to resolve these conflicts.
What are the conflicts between shareholders and managers?
The conflicts between stockholders and the managers of a business include the following: The more money that managers make in wages and benefits, the less stockholders see in bottom-line net income. Stockholders obviously want the best managers for the job, but they don’t want to pay any more than they have to.
When can there arise a conflict between shareholders and managers goals?
Shareholders are owners of the company whereas debtholders are lenders to the company. A debtholder is one who receives the same payment no matter how well an organization does. Debtholders are often an organizations bankers or bondholders. Shareholders are individuals who own shares in the organization.
Should shareholders take actions that are detrimental to bondholders?
Should shareholders (through managers) take actions that are detrimental to bondholders? Is maximizing stock price the same thing as maximizing profit? -No. Generally, there is a high correlation between EPS, cash flow, and stock price, and all of them generally rise if a firm’s sales rise.
Why might stockholders prefer riskier projects than bondholders?
Stockholders are more likely to prefer riskier projects, because they receive more of the upside if the project succeeds. By contrast, bondholders receive fixed payments and are more interested in limiting risk. Bondholders are particularly concerned about the use of additional debt.
What is a conflict of interest between stakeholders?
When stakeholders want different outcomes from a business activity and are unable to meet or accomplish their needs or wants, this is referred to as a conflict of interest. As we noted, each stakeholder has a different interest and the business organization cannot treat all stakeholders equally.
What are some possible agency conflicts between inside owner/managers and outside shareholders?
The possible agency conflict between inside owner/managers and the outside shareholders is the consumption or the indulgence in perks.
How are shareholders affected by a business?
Shareholders primarily affect a business through their voting rights in company decisions. Shareholders generally have power equal to the percentage of shares they own. The board of directors makeup also is voted on by shareholders in proportion to the company ownership.
How can bondholders protect themselves from managers action that negatively impact bondholders?
How can bondholders protect themselves from managers’ actions that negatively impact bondholders? By including covenants in the bond agreements that limit firms’ use of additional debt and constrain managers’ actions in other ways.
Should shareholders through managers take actions that are detrimental to bondholders quizlet?
What are the sources and consequences of conflict between stockholders owners and bondholders?
For example, stockholders have an incentive to take riskier projects than bondholders do, as bondholders are more interested in strategies that will increase the chances of getting their investment back. Shareholders also prefer that the company pay more out in dividends than bondholders would like.
Shareholder-Creditor Conflict and Payout Policy. Under the agency theory, shareholders may pay excessive dividends at the expense of creditors to maximize shareholder value when the debt contract is in place. In equilibrium, firms pay out more than the first best in the presence of the shareholder-creditor conflict.
Do bondholders and stockholders have a conflict of interests?
Bondholders and stockholders have conflicting interests regarding investment, financing, and dividend policies. To resolve this conflict, bondholders and stockholders apply constraints and restrictions to management’s decision-making authority (Smith & Warner, 1979). Such constraints and restrictions lead to agency costs.
Does dividend payout reduce shareholder conflict?
This strategy may increase the access to new equity and reduce the cost of capital. Hence, dividends will be lower the more serious the potential shareholder conflict under the opportunistic hypothesis, but not under the conflict-reducing hypothesis.
We analyze private firms with majority control for three reasons: shareholder conflicts are particularly serious in majority-controlled firms, majority control is much more common in private firms than in public firms, and private firms with majority control have particularly low levels of separation between ownership and management.