Discussion

Briefly describe the agency problem that exists between owners and lenders. How do lenders cause firms to incur agency costs to resolve this problem?

To get us going, lenders are not involved in the day-to-day operations and business decisions made by the owners in running their businesses.  Also, owners may not be making decisions, both short- and long-term, which are in the best interest of their lender(s) or that might affect a lender’s decision with regards to lending money to a business (or its owners).  Hence, the agency problem that exists in this type of relationship.