CG2016Q5 Flashcards
What are agency costs?
Costs that occur to owner due to conflicts of interests with managers
- Monitoring expenditure
- Bonding expenditure by agents (incentives)
- Residual costs (value loss for wrong decisions)
What are the control mechanisms for agency costs?
- Executive compensations
- Board of directors
- Large investors
- Takeovers
- Auditors, ratings etc.
What are the agency benefits and costs?
What are the three types of agency problems?
- Owner vs. manager (type 1)
- Majority vs. minority owners (type 2)
- Shareholder vs. stakeholder (type 3)
What is the owner-manager problem?
When agent doesn’t act in the interest of the principal
What is the majority and minority investor problem?
When there are conflicting interests between the minority investors and majority investors.
What is the shareholder and stakeholder problem?
When shareholders make decisions in their own interest (fx short term profit, resulting in worse long term results)
What is the Rule of man?
Always seek to maximize own benefits and personal utility. Moral responsibilities to act in someone else’s interest are second priority.
What is adverse selection?
When there is asymmetric information, so one part knows more than the other part. Example with ‘Lemons’, seller knows more about the condition of a car than the buyer.
What is moral hazard?
When one part takes more risk, than he would otherwise have done, because he does not bear the same risk.
Solution is for managers to share some of the same risks as owners.
What are the 5 things Agency theory consists of?
- Rule of man
- Interest divergence
- Agency problems
- Agency costs
- Control mechanisms
What is Stewardship Theory?
The theory that managers, left on their own, will act as responsible stewards of the assets they control. Alternative to the agency theory.
What is the difference between agency and stewardship theory?

What are the two ways to view the firm?
- Firm oriented view
- Owner oriented view
What are the assumptions in agency theory?
- separation between principal and agent
- conflicting interests
- rationality
- asymmetric information
- uncertainty
- risk aversion
What is ownership?
A set of rights and obligations concerning assets such as:
- user rights
- profit rights
- disposal rights
- control rights
However, it also includes some responsibility! fx if you own a gun, it is your responsibility that the neighbour’s children cannot find it easily.
What are active and passive owners?
Passive: never interfere in the running of the firm
Active: interfere in the running of the firm, and typically a seat in the board
What is under-monitoring?
When many small owners, hence, no incentives to take the burden of monitoring management.
What is self-dealing?
Managers use private information to extract from the firm through transactions
E.g. letting another company they own buy cheap from the company they run.
What agency problem does dispersed ownership relate to?
Agency type 1 problem (owner vs. manager)
Manager has extensive power due to collective action and free rider problems
What agency problem does concentrated ownership relate to?
Agency type 2 problem (majority vs. minority owners)
Owner is more powerful, and has more incentive to monitor, however, his portfolio risk is greater.
Is it better to have a concentrated or dispersed ownership structure?
Many researchers find a U-shaped link between the two. So something somewhat in the middle is optimale.

When is a firm’s structure called a pyramid?
When there is at least one publicly listed firm between the ultimate owner and the firm
What is cross-holdings?
When a publicly traded company does have share of its (ultimate) owner.
