Table of Contents
How are agency problems solved?
You can overcome the agency problem in your business by requiring full transparency, placing restrictions on the agent’s capabilities, and tying your compensation structure to the well-being of the principal.
How do you resolve the agency problem between shareholders and creditors?
The problem between shareholders through managers and creditors is solved by providing higher risk premiums to creditors for hi her level of risk.
What are agency problems and how do they come about?
Agency problems arise when incentives or motivations present themselves to an agent to not act in the full best interest of a principal. Through regulations or by incentivizing an agent to act in accordance with the principal’s best interests, agency problems can be reduced.
Which one of the following actions by a financial manager creates an agency problem?
Which one of the following actions by a financial manager is most apt to create an agency problem? Increasing current profits when doing so lowers the value of the firm’s equity.
How can a board of directors reduce an agency problem?
One of the ways to reduce agency costs is to align an agent’s interest with a principal’s interest, because the agency problem arises due to divergent interests. For example, requiring directors to own company shares can motivate directors to work for the company’s best interest, rather than directors’ interest.
What are the main reasons for agency problems?
The main reasons for the principal-agent problem are conflicts of interests between two parties and the asymmetric information between them (agents tend to possess more information than principals). The principal-agent problem generally results in agency costs that the principal should bear.
Which one of the following actions by a financial manager Most meets the goal of financial management?
The correct answer is C- agreeing to expand the company at the expense of stockholders’ value. Financial mangers aim at maximizing shareholders wealth… See full answer below.
Which of the following actions are likely to reduce agency conflicts between stockholders and managers?
The answer is B. Placing restrictive covenants in debt management would be more relevant to reduce the agency conflict between the shareholders and…
How do you mitigate the principal-agent problem?
The best way to solve the principal-agent problem is to craft the right incentives for the agents. And these incentives should align with the incentives of the principal. Incentives are rewards and punishments that impact human behavior.
How do you mitigate the principal agent problem?
How to resolve agency problems between the stockholders and the management?
The agency problems existing between the stockholders and the management of the company can be resolved by means of offering stock packages or commission to the decisions taken by the management and their outcomes on the shareholders.
What is the agency problem in corporate finance?
Updated Jul 14, 2019. The agency problem is a conflict of interest inherent in any relationship where one party is expected to act in another’s best interests. In corporate finance, the agency problem usually refers to a conflict of interest between a company’s management and the company’s stockholders.
What is a fiduciary agency problem?
Agency problems are common in fiduciary relationships, such as between trustees and beneficiaries; board members and shareholders; and lawyers and clients. A fiduciary is an agent that acts in the principal’s or client’s best interest.
What is the manager’s role in making decisions for the shareholders?
The manager, acting as the agent for the shareholders, or principals, is supposed to make decisions that will maximize shareholder wealth even though it is in the manager’s best interest to maximize their own wealth.