Both Alward and Rofter are large public corporations with subsidiaries throughou

Question

Both Alward and Rofter are large public corporations with subsidiaries throughout the world.   Alward uses centralized approach and makes most of the decisions for its subsidiaries. Rofter uses a decentralized approach and its subsidiaries make most of their own decisions.   Which of the following is correct?

a) agency costs would be the same for both companies

b) a decentralized approach is almost always better

c) a centralized approach is almost always better

d) the agency problem would probably be more pronounced for Rofter  because of a higher probability that subsidiary decisions would conflict with the parent

e) none of the above

Explanation / Answer

Answer is C -

Under decentralised approach there are more chances of parent subsidiary conflicts...Therefore to monitor subsidiary parent will appoint a agent to make sure that subsidiary is working for the objective of company and not for there own objectives.

(a) Agency cost would b higher in case of decentralized therefore agency cost are not same. (False)

(b & c) No because both approaches have there own advantages and disadvantages.

Please provide feedback....... Thanks in advance..:-)

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