Types Of Financial Resources : Shareholders And Debt Holders

1932 Words8 Pages
Nowadays, although 71% of firms are sole proprietorships, only 5% of revenue is derived from them. In fact, 84% of revenues are derived from Corporations (Berk and DeMarzo, 2014; Figure 1.1). Corporations are firms owned by multiple owners called shareholders (Berk and DeMarzo, 2014) but run by managers who make decisions on their behalf. Therefore, a problem arises from the separation between “ownership” and “control” (Jensen and Smith, 1985), the agency problem. Firms have two types of financial resources: shareholders and debt holders, each type has a different concern. While shareholders are wealth maximisation focused, debt holders are concerned with the ability of the firm of paying them back - with an agreed-upon interest rate. As…show more content…
Then we will discuss the possible consequences of these agency problems; and therefore whether efficient solutions to these problems exist. To begin with, the agency problems exist because of the separation of ownership and control (Berk and DeMarzo, 2014). This separation leads to serious conflicts of interest: a player act based on its own interests at the expense of others ' (Jerzemowska, 2006). Jensen and Smith agree that there are two types of conflicts of interest: between shareholders and managers on one hand and between debt holders and shareholders on the other hand. Why, instead of align their interests to make the firm better off, each party try to act for its own interests? First, we deal with the conflict of interest between managers and shareholders. As we said previously the manager 's role is to increase shareholders ' wealth through his decisions. When a good decision is aligned with shareholders ' interests, they are better off. Berk and DeMarzo (2014) take as example Apple shares which are worth 60 times more than in 2001, thanks to the launch of the first iPod. By means of the managers ' decision of Apple in 2001, shareholders increased their wealth. Despite this willing to take good decisions for the shareholders ' interests, managers tend to act differently. For instance, Wal-Mart Stores in 2010 gave million dollars to charity, which decreased shares ' value. Despite this ethical decision, most shareholders did not feel that it was in
Open Document