agency cost reduction

[ajsa]

Hi David,

could you explain how structured finance can reduce agency cost ?

thanks.

 

[David Harper CFA FRM]

Hi asja,

In the current environment, that assertion from Culp looks debatable (if not almost funny)...I think he means: if you buy common shares in my company, you have to worry (incur a cost) about my whole business (all the cash flows above the residual).. the "agency costs" for common sharesholders, I would think, is essentially the entire governance structure (e.g., Board)...but if i structure something where you hold securities against "carved out' (or ring fenced) liabilities...or against assets in the remote SPE...then you don't have to monitor my entire company, you only have to monitor (incur agency costs) the collateral that specifically backs your investments...David