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Financial Theories Overview Essaycosts of capital to a firm would remain the aforementioned(prenominal) no matter what combination of financing sources the firm actually chose (Miller, 2001, p. 185). The dividend proposition overcomes objection to leverage proof. 3. Agency Cost Theory I Michael Jensen and William Meckling define influence costs as the costs associated with cooperative effort by human beings, which arises when the principal hires an agent to carry out duties Oensen, 2005).Conflicts of interest between management and sh atomic number 18holders are inevitable and can cause a potential loss in value of public corporations (Chew, 2001). For example, shareholders may want management to increase shareholder value, solely management may grow the business to increase personal power and wealth (Chew, 2001). Enrons company was worth $30 billion and senior managers tried to agree a $40 billion of excess valuation.Ultimately Enron executives destroyed the company by try ing to fool the markets through accounting manipulations, hiding debt through off-balance tab partnerships, and over hyped new ventures such as their broadband futures effort Oensen, 2005, pp. 10-11). John Roth, former chief executive officer (CEO) of Nortel, wrote off most cquisitions, when stock monetary value crashed and closed down activities, which resulted in the destruction of not only the corporate value but also the social value of the company Oensen, 2005). Finance scholars order a reduction in conflict of interest between management and shareholders because of (1) product market competition and a market for executive labor