Report: Agency Cost Analysis in Advance Financial Accounting

This report delves into the concept of agency costs, as defined by Jensen and Meckling (1976), and examines their impact on various financial scenarios. The assessment identifies and analyzes agency costs across three distinct scenarios, determining whether the cost levels are high, medium, or low. It explores different types of agency costs, such as opportunistic behavior and monitoring costs, and investigates the specific agency costs an investor might assume in each scenario. Furthermore, the report recommends appropriate corporate governance mechanisms, including external and internal audits, to mitigate the negative effects of agency costs and improve investment decision-making. The analysis draws upon key academic sources, including Coffee et al. (2018) and Kim & Sorensen (1986), to provide a comprehensive understanding of agency problems in finance and the strategies to address them.

Running head: ADVANCE FINANCIAL ACCOUNTING
Advance Financial Accounting
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
Introduction:...............................................................................................................................2
1. Identifying whether the identified agency cost is high, medium or low level:......................2
2. Type of agency cost likely to be assumed by an investor:.....................................................2
3. Type of corporate governance mechanism which might be appropriate for addressing the
type of agency cost:....................................................................................................................3
Conclusion:................................................................................................................................4
References and Bibliography:....................................................................................................5

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Introduction:
The assessment aims in detecting the agency cost that is affecting three different
scenarios. The assessment also aims in depicting the level of agency cost, which is affecting
different scenarios.
1. Identifying whether the identified agency cost is high, medium or low level:
Scenario 1:
1. The agency cost identified from the case scenario is relevantly high, as the investor is
holding the highest level of shares is still separated from in the management (Coffee et al.
2018).
2. The agency cost however is low where the investor holding the highest amount of shares
is not separated from the management.
Scenario 2:
The scenario indicates the Michael Bloomberg decision for investing in certain listed
company indicates a medium level agency cost condition.
Scenario 3:
The third scenario indicates that high level of agency cost is detected, as the
investment is conducted on the company, which has high debt accumulated (Jensen and
Meckling 1976).
2. Type of agency cost likely to be assumed by an investor:
Scenario 1:

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The agency cost “The costs of opportunistic behaviour by the agent” is detected in the
scenario where Birim equity is separated from the management. However, the agency cost
“The costs to the principal of monitoring the agent” is detected when the scenario occurs
where Birim equity is not separated from the management.
Scenario 2:
The second scenario indicates that Michael Bloomberg intends to invest his
inheritance in a listed firm, which initiates the agency cost named “Bonding cost” (Kim and
Sorensen 1986).
Scenario 3:
The third scenario indicates that Tori being a small-time investor are investing in an
organisation, which has a large bank loan on books, where the agency cost “The costs to the
principal of monitoring the agent” is detected.
3. Type of corporate governance mechanism which might be appropriate for addressing
the type of agency cost:
Scenario 1:
1. Under the first scenario condition Birim equity is separated from the management, where
external corporate governance mechanism can be initiated, which might help in
evaluating the current financial position of the company.
2. Under the scenario, where Birim equity is not separated from the management then
internal corporate governance mechanism can be initiated, where adequate internal audit
can be conducted for detecting the current position of the organisation.
Scenario 2:

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The second scenario relevantly indicates an investment that needs to be conducted in
a listed company, where the initiation of Independent audit corporate governance mechanism
can help in controlling the agency cost (Rashid 2016).
Scenario 3:
The third scenario indicates that investment in an organisation with high debt will
directly have high agency cost, where the initiation of independent audit corporate
governance mechanism will mainly reduce the level of risk associated with investment.
Conclusion:
The relevant evaluation is conducted in the assessment, where the levels and the
agency cost affecting the scenarios are adequately depicted. In addition, the corporate
governance mechanism is adequately addressed for each scenario, which can help in reducing
the negative impact of the agency cost. The understanding of the agency cost might help
investors in making accurate investment decisions.

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References and Bibliography:
Coffee, J. C., Jackson, R. J., Mitts, J., and Bishop, R. 2018. Activist Directors and Agency
Costs: What Happens When an Activist Director Goes on the Board?
Jensen, M. C., and 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., and 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.
Rashid, A., 2016. Managerial ownership and agency cost: evidence from
Bangladesh. Journal of business ethics, 137(3), pp.609-621.