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Finance Theory Essay

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Below is an essay on "Finance Theory" from Anti Essays, your source for research papers, essays, and term paper examples.

Current Research in Corporate Finance

      We start the discussion with explaining how the Agent’s roles and responsibilities affect the ethical climate of the firm.   Finance Professionals have struggled to determine if the effect of personal values and corporate codes of conduct can establish the likelihood of managers intentionally misrepresenting financial reports.   A study was conducted and published in the Treadway Commission report states “creating an ethical climate may be the answer to deterring fraudulent financial reporting” (Brief et al., 1996).   In the study the authors designed the results of the experiment in a fashion to shed light on the usefulness of emphasizing personal values of corporate management.   The study in the Treadway report focuses on the Agents interests in Corporations.   Conflicts of interest exist between shareholder and agent’s personal interest in the firm.   The Agency Theory is an attempt to analyze the conflicts of interests that exist between corporate managers and shareholders.   According to Michael Jensen in his article entitled “Agency Costs of free cash flow, corporate finance and takeovers” Managers have incentives to cause their organizations to grow beyond the optimal size.   The conflict exists over payout policies when the organization grows and generates substantial free cash flow.   According to Jensen (1988) the problem with the Agency Theory is how to motivate managers to disgorge the cash rather than investing it below the cost of capital or wasting it on organization inefficiencies.  
    When agents do not appropriately invest free cash flow the result is overvalued equity.   In Jensen’s recent article entitled “Agency costs of overvalued equity,” he asserts that the increase in corporate scandals and value destruction is due to overvalued equity.   When a firm’s equity becomes substantially overvalued it sets in motion a set of organizational forces that are extremely difficult to manage.   These forces...

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Finance Theory. Anti Essays. Retrieved June 17, 2018, from the World Wide Web: https://www.antiessays.com/free-essays/Finance-Theory-18734.html