In theory: there is no conflict of interests between stockholders and bondholders.
In practice: Stockholder and bondholders have different objectives. Bondholders are concerned most about safety and ensuring that they get paid
their claims. Stockholders are more likely to think about upside potential
Examples of the conflict..
Increasing dividends significantly: When firms pay cash out as dividends, lenders to the firm are hurt and stockholders may be helped. This is because
the firm becomes riskier without the cash.
Taking riskier projects than those agreed to at the outset: Lenders base interest rates on their perceptions of how risky a firm’s investments are. If stockholders then take on riskier investments, lenders will be hurt.
Borrowing more on the same assets: If lenders do not protect themselves, a firm can borrow more money and make all existing lenders worse off.
Some critiques of market efficiency..
Investors are irrational and prices often move for not reason at all. As a consequence, prices are much more volatile than justified by the underlying fundamentals. Earnings and dividends are much less volatile than stock prices.
Investors overreact to news, both good and bad.
Financial markets are manipulated by insiders; Prices do not have any relationship to value.
Investors are short-sighted, and do not consider the long-term implications of actions taken by the firm
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