Auditing (Demand)

4 important questions on Auditing (Demand)

Why increases the demand for audit in time?

Because nowadays there are more firms with principal-agent problems

What two manners evidence on managerial shareholding influences the agency costs?

1. Divergence-of-interest effect
2. Entrenchment effect

What is the entrenchment effect?

Managers with more shares, and thus greater control, have more power and opportunity to act opportunistically, Raising managerial shareholding when the entrenchment effect dominates leads to deeper entrenchment and therefor higher agency costs.
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What is the divergence-of-interests effect?

Interests of managers and shareholders are poorly aligned due to little or no managerial shareholding. Raising managerial shareholding when the divergence-of-interests effect dominates leads to btter alignment of interests and therefore to a decline in agency costs.

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