Jensen and Meckling (1976) refers to the costs that arise due tothe use of an agent by a principal in an agency relationship asagency cost. These costs include (1) the costs ofopportunistic behaviour by the agent (such as whenthe agent places his own self-interest over that of theprincipal’s), (2) the costs to the principal ofmonitoring the agent; and (3) the“bonding” costs incurred by the agent toinduce the principal to rely on it. Nonetheless, the opportunisticbehaviour of the agent may work in the favour of principal when theagent contracts with other parties such as debtholder. Thisphenomenon has been explained as the agency cost of debt (Kim andSorenson, 1986). Furthermore, Coffee, Jackson, Mitts and Bishop(2018) extend the agency cost argument to the relationship betweenthe different types of shareholders associated with moderncorporations. Specifically, Coffee et al., (2018) find that thereis the tendency for strong and powerful shareholders to exploitless powerful shareholders. These empirical evidences suggest thatany investor may be susceptible to some form of exploitation asresult of the agency relationship and its associated agencyproblem.

Critically examine the following scenarios and statewith explanation;

Whether an investor has a high, medium or low level of agencycost

The type of agency cost likely to be assume an investor

The type of corporate governance mechanism which would beappropriate 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 firmswith 25 subsidiaries which operates from different part of theworld. On 30th July 2018, Birim Equity fund acquired an additional25% of shares of ABC Ltd resulting in its total shareholding of48%. The Herald Sun in its business segment described theacquisition as one which makes Birim Equity a dominant shareholder.How would this situation affect agency cost for prospectiveinvestor if

Birim Equity is separated from management

Birim Equity is not separated from management

SCENARIO TWO

Michael Bloomberg, a recent graduate of La Trobe Universityreceived $0.5 million cash as his inheritance after the death ofhis father. Michael has decided to invest his wealth in a listedfirm which characterised by many shareholders with each shareholderhaving 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 thescenarios:

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 impactof the agency costs of debt on corporate debt policy. Journalof Financial and quantitative analysis, 21(2),131-144.

Coffee, J. C., Jackson, R. J., Mitts, J., & Bishop, R.(2018). Activist Directors and Agency Costs: What Happens When anActivist Director Goes on the Board?

Required Length: 500 words excluding the references.

Marking criteria

Marks will be allocated to:

Clear and concise discussion of the key points

Relevance to the topic and evidence of wide reading/research

Presentation – format, spelling, vocabulary, readability

Appropriate referencing, including in-text referencing and areference listStudents may follow either:

Harvard referencing style or ;

APA 6 referencing style