Premium Essay

Finance Statement

In: Business and Management

Submitted By tnesh9007
Words 1798
Pages 8
The relationship between management and shareholders is sometimes referred to as an Agency Relationship, in which managers act as agents for the shareholders, using delegation powers to run the affairs of the company in the best interest of the shareholders. Since the agent and the manager may have different value of the company to perform agency relationship share prices.When a manager hires an agent to carry out specific tasks, the hiring is be called principal agent relationship, or simply an agency relationship. When a conflict of interest between the needs of the principal and those of the agent arises, the conflict is called an agency problem.In financial markets, agency problems occur between the stockholders and corporate managers .While the stockholders call on the managers to take care of the company, the managers may look to their own needs first.

It should be stressed that most severe conflict of interest exists between shareholders and managers . This situation exists despite the rights of shareholders to manage the company by participating and they may also sell the shares that they own and put their company at risk of being taken over, For example, if managers hold none or very little equity shares of the company they work for, what is to stop them from working inefficiently, not bothering to look for profitable new investments opportunities, or giving themselves high salary or perks and managers avoid problems stemming from reductions in employment levels,which in crease with the changes in control of a company, the mangers tend to increase the size of companies even if it harms the interests of shareholders.

A type of internal cost that arises from, or must be paid to, an agent acting on behalf of a principal. Agency costs arise because of core problems such as conflicts of interest between shareholders and management. Shareholders wish…...

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