GTD Financial Advisory

Conflict of Interests between Shareholders and Bondholders. An applicable situation to the Chilean market?

Nelson Escobar

Modern finance not stops surprising us. What sensed until recently, development and financial discipline are confirming. In particular the problem of Agency takes our attention this time.
Many dimensions of this conflict of interest you have seen addressed in the recent literature. One of them we will analyze through this paper
The option pricing theory allows us to tackle decisions of capital structure from different points of view. We will focus on the conflict of interest produced between shareholders and bondholders.
Let us agree, however, that both shareholders and bondholders perform different functions and they have to maximize their objectives. This is the first edge of the conflict. Even though the shareholders are willing to assume more risky projects than the bondholders and eventually distribute large dividends that the bondholders would like to.
The value of equity can be modeled as a “CALL” option (ceteris-paribus) over the price of a company (“The Promise and Peril Of Real Options, A. Damodaran, Stern School of Business, NYU).
When increasing the variance (σ2) over the value of the company, it produces an increasing in the value of equity. Read more

Nelson Escobar Arguedas is Partner in Novagestion Financial Advisory. Nelson is a Civil Engineer from University of Chile and holds a Master in Business Administration and a Master in Financial Management. He has more than 23 years of professional experience developing strategic, financial and operational consulting.

Editorial | Author: NEscobar | Publication date: '24 Feb 2014'

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