Question

Agency costs arise from the conflict between stockholders and bondholders, but they do not impose any real costs on firms. Provide a brief commentary on whether or not this is true.

Answer 1

Agency conflicts generally arise from stockholders and the management of the company but agency conflict can also be arising out of the conflict between the shareholder and the bondholder because share holder will always be wanting for taking maximum risk in order to maximize their overall capital of the firm whereas, bondholder will be trying to protect their capital into the company and they will be trying to minimise the risk and they will be trying to interfere into the operation of the company so that the company does not take unnecessary risk that will be posing risk of repayment of capital to these bondholders.

these agency cost does not have a real cost on the firm but these will be incurring in the form of opportunity cost because the interference by the bond holder can lead to unnecessary restrictions that would be leading onto missing out on opportunities, and the agency conflict is leadingleading out to be opportunity cost so they generally do not have any real cost but they do have the opportunity cost associated with them so I will be agreeing with the statement that bondholder and shareholder are always creating agency conflicts