Stockholders Versus Creditors

An agency problem also exists between stockholders and creditors. There is conflict in the interest of stockholders and creditors. Creditors provide certain portion of capital to business firm and receive a fixed interest as return. Creditors do not want to take high risk. They always oppose high risk because they do not receive additional return for taking high risk. Creditor's interest is to earn a fixed return on their investment and recover their capital upon maturity. On the other side, stockholders emphasize on maximizing the value of their investment by taking high risk. Thus, stockholders and creditors want to fulfill their diverse interest from the same business firm.
This problem is generally solved by providing higher risk premium to creditors form taking higher level of risk. Risk premium can be provided by using risk adjusted market interest rate, and creditors are compensated for taking higher level of risk.