An Agency theory perspective
7 important questions on An Agency theory perspective
When does the agency relation arise?
What is the agency problem? Why does this problem arise? When can the problem be dealt with? What are the consequences of the problem?
You employ managers because they should know more than you do so it is difficult to question their actions.
Managers are at information advantage compared to the shareholders so they do not find out before it is too late.
It is hard to do something about the problem immediately since a manager can only be evaluated after a considerably amount of time when it is most often too late and the company has suffered losses.
What is the difference in the interest for the company of managers and shareholders?
- Short term profits
- Self-interest: Do what is best for them and not for the company
Shareholders:
- Long term profitability
- Interested in how the company as whole is performing.
- Higher grades + faster learning
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What is the moral hazard problem? Of what two conditions does this problem consist of?
Moral Hazard problem arises when:
- The principal find it hard to evaluate the agent on his performance because of information disadvantage
- The agent is pursuing goals that are different from the principal's.
What does self dealing mean in regards to managers in an organisation?
What are governance mechanisms in relation to principal and agent?
What are the two possible ways of aligning the interest of the management and the shareholder and what is the advantage of them?
- Monetary rewards in the form of stocks or stock options that are linked to the company’s performance.
- Top managers become interested in the long term performance of the company.
Promotion tournaments and career paths
- Allows managers to rise to the top
- Companies sends a signal on how future management behaviour should be. Managers become interested in the long term and not short term, self interest.
The question on the page originate from the summary of the following study material:
- A unique study and practice tool
- Never study anything twice again
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