Select as choices all of the following that you believe depict the \'agency\' re

Question

Select as choices all of the following that you believe depict the 'agency' relationship inside the corporation.

Note: A correct answer requires that you check ALL that apply.

In the context of the agency relationship managers are the principals. In the context of the agency relationship shareholders are the principals. The goal of shareholder wealth maximization often leads to agency costs. The compensation plan has many advantages but using it to reduce agency costs is NOT one of these advantages. One type of agency costs are lost opportunities caused by conflicts too difficult to resolve. The goals of the managers may not always align themselves with the goals of the shareholders. One of the goals of the study of modern corporate finance is to maximize agency costs.

Explanation / Answer

In the context of the agency relationship managers are the principals.

Managers are principal in the sense that they undertake the Agency agreement with the agent on behalf of the Corporate. Hence acting as a Principal to the Agent.

The goal of shareholder wealth maximization often leads to agency costs.

There is often a conflict of interest between shareholders and the Board of Directors between maximizing of shareholder’s wealth and other interest of the Corporate that ultimately gives rise to the Agency costs.

One type of agency costs are lost opportunities caused by conflicts too difficult to resolve.

When the conflicts of interests are not sorted, it surges the Agency costs owing to the continuous disagreements between the shareholder’s and the Board.

The goals of the managers may not always align themselves with the goals of the shareholders.

It is hence one of the reasons why managers have a conflict of interests with themselves to satisfy the shareholders but that shall not always give rise to the agency costs because managers oblige if the Board is in agreement with the shareholders.

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