efficient market hypothesis and the cost of capital
The quote shows a strong relation to the efficient market hypothesis (EMH), as it implies that the costs of capital are dependent from the amount of information given by the company.According to my opinion, agency theory is a good explanation for costs of capital. Agency theory defines contracts as under which one party - called principal - engages another party - called the agent - to perform service on the principal's behalf. Concluding, the principal delegates decision-making authority to the agent. Both sides of the contract are utility maximisers and the agent will not necessarily act in the principal's best interests. This leads to the rise of agency costs. Agency costs are the welfare reduction by the principal due to the divergence of the interest. There are three agency costs (1) monitoring costs, (2) bonding costs, and (3) residual loss. (1) Monitoring costs are the costs of monitoring agent's behaviour. They are expenses of the principal to measure, observe, and control the agent's behaviour. Good examples for monitoring costs are auditing costs. To protect themselves of huge monitoring costs principals are bearing the costs to agents. An example can be given in lending: A high-risk company has high monitoring
To account for foreign currency translation the current method and the temporal method exist. In 1994 74% of the Australian companies used the current method but did not state why they did it [Source: J. Williams in Ryan and Heazlewood (1995), p.110]. Further, new financial instruments (derivate) cause a lot of accounting problems. Eg they have to be recorded different if they are used for different purpose as trading, hedging or speculation. (2) The mechanisms mentioned above are bonding costs, because they are the costs of bonding the agent's interest to the principal's. Quarterly financial reports are bonding costs, namely the time and effort invested to generate the financial report. Agents will normally weigh bonding costs with monitoring costs and chose the cheaper alternative.
Some common words found in the essay are:
, According EMH, Corporations Law, Phil Hancock, III Semester, Ryan Heazlewood, financial accounting, Financial Accounting, Western Australia, semester 1998 ed, Accounting III, University Perth, 1998 ed phil, western australia, university perth western, perth western, university perth, murdoch university, phil hancock, cited financial, murdoch university perth, semester 1998, ed phil hancock, ed phil, iii semester,
Approximate Word count = 2747
Approximate Pages = 11 (250 words per page double spaced)
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