Genzyme Corporation Essay

Genzyme has a tradition to be financed with equity. High equity balance has advantages much(prenominal) as low agency costs relate to debt, lower financial stress and more flexibility for worry, which is especially crucial for start-up companies, such as in the early stage of Genzyme. However, besides losing the tax riddle from debt, eminent equity financing leads to an increasingly diffused ownership, which would in shimmer causes riddles such as sh atomic number 18holder management principal constituentive role problem and asymmetric info problem. Principal agent problem As agent of the shareholder (principal), management should aim at maximizing shareholders abide by, i.e. the market value of the equity. However, management tends to serve its own interests. In order to cast off management act in line with the shareholders interest, agency costs of managerial incentives are induced. For Genzyme, to increase supplement is one way to reduce managerial incentives relat ed agency costs. However, management generally does not prefer debt, since higher supplement implies higher risk for bankruptcy as financial distress increases with the leverage level. In order to mitigate this problem, Genzyme can try to offer stipend contracts which fall compensation to the firm specific risks that managers are facing.This allow make sure management to act in line with shareholders interest. Beside principal agent problem, low debt equity ratio can also cause high indecent selection cost induced by asymmetric instruction. noninterchangeable information problem the separation of ownership and control of the firm will lead to asymmetric information problem. Management obviously has more information than shareholders and often will not disclose certain crucial information about firms strategic plans or operations. This will of course have impact on the market value of a popular traded firm like Genzyme. With asymmetric information, the market value of the f irm ability not reflect the true value of the firm. The market value tends to reflect a pooling equilibrium, because of high adverse selection. Fully separating equilibrium can alone be obtained through firms sending unique, powerful precisely costly signals to the market. Therefore, Genzyme Corporation faces high signaling cost related to adverse selection induced by asymmetric information problem. Debt again serves pricey to mitigate information asymmetry problem and to discipline management.