Cooper Corporation's management currently owns 1 per cent of the firm's outstanding shares. The firm is currently
Question:
Cooper Corporation's management currently owns 1 per cent of the firm's outstanding shares. The firm is currently financed with 50 per cent debt and 50 per cent equity, but it is planning to increase its leverage ratio to 80 per cent debt by borrowing and using the funds to repurchase shares. Management has decided not to participate in the repurchase, so their percentage ownership of the firm will increase. Explain briefly how managers' investment incentives are likely to change after the recapitalization. Specifically, discuss their incentives to take:
a) negative-NPV projects that benefit them personally
b) risky projects
c) long-term projects that take more than 10 years to provide an adequate return to capital.
Principles of Auditing An Introduction to International Standards on Auditing
ISBN: 978-0273768173
3rd edition
Authors: Rick Hayes, Philip Wallage, Hans Gortemaker