E2: Agency Flashcards
1
Q
Define the principal-agent problem
A
When managers do not act in the shareholder’s interest
1
Q
Give some examples of the principal agent problem
A
- overinvestment
- perks
- reduced effort
- short terminism
- risk taking
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
3
Q
Who are the principals and agents in finance?
A
principals = shareholders / owners
agents = employees / managers
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
5
Q
What are the three kinds of stock managers might be paid with?
A
- stock options
- restricted stock (must be retained for an amount of time)
- performance shares (awarded if company performs to a certain level)
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
7
Q
A