Advance Financial Accounting: Agency Costs and Governance

This essay critically examines agency costs in various financial scenarios, drawing upon the theories of Jensen and Meckling (1976) and Coffee et al. (2018). It identifies the levels of agency costs associated with scenarios involving varying equity holdings, investments in listed companies, and high-debt accumulation. The analysis includes identifying costs related to opportunistic behavior, monitoring, and bonding. Furthermore, the essay discusses the different corporate governance mechanisms, both internal and external, that can be implemented to mitigate these agency costs, such as independent audits and adjustments to management structures. The paper concludes by referencing the importance of aligning investor interests with company management to reduce exploitation and improve overall financial performance. Desklib offers a platform to explore similar solved assignments and study tools for students.

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

ADVANCE FINANCIAL ACCOUNTING
1
Table of Contents
1. Mentioning about the different level of agency cost associated with the scenarios:.............2
2. Depciting the agency cost associated with each scenario:.....................................................2
3. Stating the different level of corporate governance mechanism that is associated with each
scenario:.....................................................................................................................................3
References and Bibliography:....................................................................................................5

ADVANCE FINANCIAL ACCOUNTING
2
1. Mentioning about the different level of agency cost associated with the scenarios:
Scenario 1:
Under the first scenario the agency cost is relevantly high, as scenario indicates that the
investor having the highest level of equity holdings is not allowed in the management of the
organisation.
The alternations in the current measure substantially reduces the level of agency cost
level is low, as the maximum equity share holder is allowed into the management of the
organisation (Alshawish, Abed and Hamadallah 2015).
Scenario 2:
The agency cost level is considered to be medium, as the overall investment is
conducted on listed company, which needs to comply with all the regulations laid down by
the stock exchange. The scenario mentions that investment in listed company has low risk,
which reduces the actual agency cost of the investor.
Scenario 3:
The agency cost level is considered to be high, as the investment in conducted on high
debt accumulated company, which raises the level of concern for the investor. Thus, the
presence of the high-level agency cost can be detected in the situation.
2. Depciting the agency cost associated with each scenario:
Scenario 1:

ADVANCE FINANCIAL ACCOUNTING
3
The presence of agency cost such as costs of opportunistic behaviour by the agent is
adequately detecting under the situation, where the investor with the highest level of equity
exposure is not allowed within the management.
On the other hand, the agency cost such as principal of monitoring the agents
detected, when highest equity holder becomes he part of the management. The alteration in
agency cost is detected under different circumstances, where it will directly have impact on
performance level of the organisation.
Scenario 2:
The situation directly depicts the presence of costs of opportunistic behaviour by the
agent, as the overall investment is conducted on listed company, where the investors does not
have any kind of say in the management decisions (Jensen and Meckling 1976).
Scenario 3:
The last situation mentions about the investment in high debt accumulated company,
which increases the chance of bonding cost by the investors. The presence of agency cost
within the situation directly alarms the current valuation of the company, which increases risk
for the investor.
3. Stating the different level of corporate governance mechanism that is associated with
each scenario:
Scenario 1:
Different level of situation mentioned in scenario 1 directly initiates alternative corporate
governance mechanism for controlling the agency cost. The situation where the highest
equity share holder is not allowed within the management will directly initiate the external

ADVANCE FINANCIAL ACCOUNTING
4
corporate governance mechanism. On the other hand, the situation where the overall highest
equity holder is admitted into the management will initiate the internal corporate governance
mechanism (Coffee et al. 2018).
Scenario 2:
The conditions of the scenario initiates Independent audit corporate governance
mechanism, which needs to be maintained by the organisation for reducing the implication of
the agency cost.
Scenario 3:
The situation depicts the presence of high level agency cost where the independent
audit corporate governance mechanism can be used by the organisation for stating their
financial performance to the investors (Kim and Sorensen 1986).

ADVANCE FINANCIAL ACCOUNTING
5
References:
Alshawish, M., Abed, S. and Hamadallah, M., 2015. The Impact of Agency Cost on Demand
for Non-Audit Services for Listed Corporations in Jordan. International Journal of Economics
and Finance, 7(7), p.154.
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.