Agency problems

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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
    • 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

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