Case Study Series
Government Ownership and Monitoring Issue
A higher cost of capital jointly with a decrease in stock price does not create value for the shareholders. Since the government owns 56% of the 600,000 shares of Agthia Group (through Senaat General Holding Corporation (51%) and Abu Dhabi Retirement Pensions & Benefits Fund (5%)), there is a negative valuation effect for the government.
The financial literature on government ownership shows that this type of ownership does not necessarily help the companies to perform. From a financial point of view, the government offers an implicit financial guarantee as a main owner of the firm. This helps the firm, specifically start-up firms as was the case of Agthia in 2004, to earn a market share and to get established in the sector. However, the government has to implement the appropriate mechanisms in order to improve the performance of the firm.
Questions for Discussion
In relationship with the three concerns presented in the first section: (1) cost of capital, (2) corporate governance, and (3) monitoring and large shareholders’ activism.
1. How do Agthia Group is performing in comparison with its peers? Use case data to justify the answer.
2. How Agthia Group’s stock price is evolving thought time?
3. Compute the overall cost of capital given the cost of equity, the cost of debt, and the proportions of total assets financed by debt and equity. Show procedure and computations.
4. What is the impact of Agthia’s merger and acquisition strategy on its overall cost of capital. Discuss this issue in relationship with the risk-return trade-off principle.
5. How corporate governance inefficiencies can impact the cost of capital? Discuss this issue relationship with agency theory.
6. How can we reduce the cost of capital? Refer to agency theory in your discussion.
7. How the government can reduce agency costs and maximize firm value?
Instructions:
1. Answer questions in the order they appear.
2. Show procedures for calculations.
3. Do research on the principles and theories mentioned in the case in order to justify your answer and include the list of references used in each question.
