How Can Shareholders and Creditors Lower the Agency Costs?
The main aim of the paper is to characterize agency costs and to point out how the actions undertaken by shareholders and creditors may limit them. Agency costs may be limited by the use of external and internal monitoring and by aligning the interests of shareholders and managers. The roles of effective and diversified boards, managerial remuneration and the quality of corporate governance reports in decreasing agency costs are pointed out. The level of debt and the use of protective covenants are also discussed as they may play an important role in solving agency problems. Other means of lowering agency costs include the securitization of debt, changing the level of dividend payments and share repurchases, the implementation of a principle against wrongful trading and the introduction of professional responsibility requirements for managers. The appropriate use of these mechanisms should reduce the agency costs and ultimately increase the value of the firm. (original abstract)
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