Topic > Essay on Agency Relationships - 1917

However, if the project fails, both shareholders and debt holders must share the cost of failure. In other words, shareholders are trying to maximize their personal wealth at the expense of debt holders. Therefore, debt holders are more likely to choose the project that can increase the likelihood of recovering their investment. The second conflict between shareholders and debt holders concerns the amount of dividend to be paid. For shareholders, a high dividend is desirable since shareholder wealth can be directly maximized with this high dividend. However, debt holders do not like the company paying a high dividend to shareholders. Because paying high dividends can lead to the reduction of the company's cash flow, which could ultimately destroy the wealth of debt holders. Section III: Control of Agency Conflicts. Agency conflicts not only indicate the different objectives in managing the business between the principal and the agent, but they can also