Critically examine the following scenarios and state with explanation;
1. Whether an investor has a high, medium or low level of agency cost
2. The type of agency cost likely to be assume an investor
3. The type of corporate governance mechanism which would be appropriate in addressing the type of agency cost
Note: the following scenarios are independent of each other.
SCENARIO ONE
ABC Ltd, an Australian based firm is a large manufacturing firms 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 prospective investor if
Birim Equity is separated from management
Birim Equity is not separated from management
SCENARIO TWO
Michael Bloomberg, a recent graduate of La Trobe University received $0.5 million cash as his inheritance after the death of his father. Michael has decided to invest his wealth in a listed firm which characterized by many shareholders with each shareholder having a small amount of shares
SCENARIO THREE
Tori, a small-time investor, has decided to invest in Dada PLC. Dada PLC has a large bank loan on its books.
Please use the following papers to critically examine the scenarios:
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of financial economics, 3(4), 305-360.
Kim, W. S., & Sorensen, E. H. (1986). Evidence on the impact of the agency costs of debt on corporate debt policy. Journal of Financial and quantitative analysis, 21(2), 131-144.
Coffee, J. C., Jackson, R. J., Mitts, J., & Bishop, R. (2018). Activist Directors andAgency Costs: What Happens When an Activist Director Goes on the Board?
Required Length: 500 words excluding the references.