Agency

Questions regarding the goal of finance and agency

Questions regarding the goal of finance and agency
  1. What are agency problems in finance?
  2. How can agency problems be overcome?
  3. What kinds of problems can arise in agency relationship?
  4. How might agency problems arise between stockholders and managers?
  5. What is the goal of financial management?

What are agency problems in finance?

An 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, an agency problem usually refers to a conflict of interest between a company's management and the company's stockholders.

How can agency problems be overcome?

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.

What kinds of problems can arise in agency relationship?

The three types of agency problems – stockholders vs. management, stockholders vs. bondholders/ creditors, and other stakeholders like employees, customers, community groups, etc.

How might agency problems arise between stockholders and managers?

Conflict of interest between shareholders and creditors arises when the managers make decisions for shareholders' value maximization by ignoring the interest of creditors. Creditors are viewed as principal and the shareholders as the agent in their agency relaüonship.

What is the goal of financial management?

The goal of financial management is to maximize shareholder wealth. For public companies this is the stock price, and for private companies this is the market value of the owners' equity.

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