Agency Problems

CONFLICTS BETWEEN MANAGERS AND SHAREHOLDER Agency theory raises a rudimentary task of contrasts between managers and sh atomic f atomic number 18 18holders in presidency self-interested behavior.In imperfect labor and expectant markets, managers go away seek to maximize their let utility and fence with the giveers goal of maximation of sh beholder wealth. Since the shareholders authorize managers to administer the firms assets, a potential conflict of interest exists between the two groups. Agents attain the ability to hold in their own self-interest or else than in the surmount interests of the firm because of asymmetric information. Managers may take up a fundamental objective of maximizing the size of the firm. By creating a large, rapidly growing firm, executives increase their own status, micturate to a greater extent opportunities for lower- and middle-level managers and salaries, and enhance their job security The risk-averse managers swing gainful opportu nities in which the firms shareholders would prefer to invest.Investors recognize that the firm will move in decisions contrary to their best Interests and will discount the prices they are unbidden to pay for the firms securities.

As a result solicitude may pursue diversification at the expense of the shareholders who slew soft diversify their individual portfolios simply by acquire shares in other companies. Managers can be encouraged to identification number in the stockholders best interests through incentives, constraints, and punishments. These methods, all the same, are effective however if shareholders can observe all of the actions taken by managers. A deterrent examplei stic hazard problem, whereby agents take uno! bserved actions in their own self-interests, originates because it is infeasible for shareholders to monitor all managerial actions. To reduce the moral hazard problem, stockholders must incur agency costs which are expenses incurred in order to sustain an effective agency race offering management performance bonuses to encourage managers to act in the...If you want to get a full essay, order it on our website: OrderEssay.net

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