E2: Agency Flashcards

1
Q

Define the principal-agent problem

A

When managers do not act in the shareholder’s interest

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1
Q

Give some examples of the principal agent problem

A
  • overinvestment
  • perks
  • reduced effort
  • short terminism
  • risk taking
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2
Q

How can you relieve the principal-agent problem?

A

Incentivsation
- ensure managers and employees are rewarded suitably when they add value to the firm- eg: stock options or generous compensation packages based on output

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3
Q

Who are the principals and agents in finance?

A

principals = shareholders / owners
agents = employees / managers

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4
Q

What is a benefit of incentising managers with stock options?

A
  • need for monitoring and cost of it is reduced as manager’s success is tied to stock success
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5
Q

What are the three kinds of stock managers might be paid with?

A
  1. stock options
  2. restricted stock (must be retained for an amount of time)
  3. performance shares (awarded if company performs to a certain level)
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6
Q

Negatives of stock-price performance

A
  • events out of the managers control may effect their copensation - eg if the economy is in a bad place. and vice versa
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7
Q
A
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