Financial Management and the Agency Theory

Shareholder Wealth Maximization as an organizational goal for private firms

Simon Bergstein

• Publisher: GRIN Verlag
• Year: 2014
• Edition: 0
• eBook ISBN:
  9783656614944
• Topic: Business
• Subtopic: Finance
• Index: Business

Essay from the year 2013 in the subject Business economics - Investment and Finance, grade: A15 bzw. 1, 0, University of New South Wales, Sydney, language: English, abstract: In Financial Management it´s generally assumed that the goal of a private firm is shareholderwealth maximization respectively maximizing shareholder value (ACCA BPP, 2012, p. 5).This assumption correspond with a recent statement of Philip Clarke (2013) - Chief ExecutiveOfficer of Tesco who declared that '[e]verything [they] are doing reflects [their]determination to deliver shareholder value'. The question arises if shareholder wealthmaximization is an appropriate goal since there are other individuals besides the shareholdersthat are affected by the activities of a firm. Another point is that managers often do not act inshareholders best interest in order to maximize their own utility. This conflict of interest isdescribed by the agency theory. Furthermore the agency relationship complicates theachievement of the goal of shareholder wealth maximization (Van Horne and Wachowicz, 2009, p.5).Recently shareholders of the former Yellow Pages publisher Hibu blame the management notto act in their best interest because of both a lack of information provided by directors and byrestructuring the company with a debt-for-equity swap that wipes shareholders out. As aconsequence of Hibu's oppressive debt mountain the debt-for-equity swap enables majorlenders to take control over the company (Spanier, 2013). In this context the concept of costof capital and its calculation provides an approach to the costs of financing decision.(McLaney, 2011, p.296). Since the debt-for-equity swap restructures Hibu´s balance sheet it isof crucial importance to examine the sources of capital that are discussed in this context inorder to evaluate the reasonableness of the debt-for-equity swap from a economicalperspective.Section 1 of this assignment focuses on the characteristics of shareholders' wealthmaximization as an organizational goal of management and discusses its link with the AgencyTheory. Section 2 gives an insight into the concept and the calculation of cost of capital. The3rd section critically evaluates the different sources of capital discussed in the previoussection. The last section summarizes the main points of the assignment and provides aconclusion.