More on agency conflicts and costs
While the agency conflicts between managers and shareholders tend to receive the most press, they are not the only agency conflict affecting the modern corporation. Another equally important agency conflict is sometimes observed between a firmĂ˘â‚¬â„˘s common shareholders and its bondholders. As before, the basis of this conflict is divergent concerns and motives. In general, bondholders purchase corporate securities that provide a return, whereas shareholders purchase shares that are likely to provide a return that fluctuates with the riskiness of the firm.
If managers undertake projects that decrease the riskiness of the firm and its cash flows, then the wealth of the firmĂ˘â‚¬â„˘s bondholders will be , while that of the firmĂ˘â‚¬â„˘s shareholders will be .
Save your time - order a paper!
Get your paper written from scratch within the tight deadline. Our service is a reliable solution to all your troubles. Place an order on any task and we will take care of it. You wonâ€™t have to worry about the quality and deadlinesOrder Paper Now
Agency conflicts between shareholders and creditors
Bondholders often employ a variety of devicesĂ˘â‚¬â€ťincluding restrictive covenants in the companyĂ˘â‚¬â„˘s bond indenture agreementsĂ˘â‚¬â€ťto protect their interests and constrain the actions of shareholders and the firmĂ˘â‚¬â„˘s managers.
Which of the following are restrictive covenants often used to protect the firmĂ˘â‚¬â„˘s bond value and bondholder wealth? Check all that apply.
Provisions that limit dividends paid to stockholders
Provisions that prohibit borrowing funds to pay dividends
Provisions that require firing the firmĂ˘â‚¬â„˘s CEO whenever the firmĂ˘â‚¬â„˘s bond price decreases by more than 15%
Provisions that limit the type of investments or divestments that the firm can undertake
In addition, potential bondholders may require a interest rate on the firmĂ˘â‚¬â„˘s soon-to-be-issued bond as compensation for the risks that cannot be adequately protected against using the restrictive covenants.