Agency problems
- Created by: Shreeya Bhan
- Created on: 05-04-13 07:22
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- Agency problems: possibility of conflict of interest b/w managers and stockholders
- lead to agency costs
- Direct cost:
- Corporate expenditure that benefits mgmt but costs the stockholders
- Expense to monitor mgmt actions
- Indirect: lost opportunity
- Direct cost:
- B/w shareholders & managers: managers want to put in less effort, are exposed to more idiosyncratic risk and have a smaller horizon
- B/w creditors and shareholders : creditors more risk averse as upside of firm only enjoyed by shareholders; increasing stock price reduces value of debt returned; dividend vs RE
- B/w creditors & managers
- Can be dealt with through: managerial compensationbased on perf and by rewarding managers who pursue stockholder goals;replacing managers through proxy fights or takeovers
- lead to agency costs
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