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) residua....

Number Of Pages: 11

Number Of Words: 2759

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