Agency problem

Agency problem

Conflicts of interest among stockholders, bondholders, and managers.

Agency Problem

A situation in which agents of an organization (e.g. the management) use their authority for their own benefit rather than that of the principals (e.g. the shareholders). The agency problem also refers to simple disagreement between agents and principals. For example, a publicly-traded company's board of directors may disagree with shareholders on how to best invest the company's assets. It especially applies when the board wishes to invest in securities that would favor board members' outside interests.
References in periodicals archive ?
Here, the agency problem that is commonplace in publicly owned corporations is much less apparent, at least as far as these company officials and favored employees are concerned.
An agency problem, however, arises if managers serve their own interest instead of shareholders'.
Despite being significant driving force in the Asian economies, family firms are also labeled with potential sources of conflict of interest and agency problems. "Agency problem Type I" is originated from the conflict of interest between shareholders and managers (Shleifer and Vishny, 1997), whereas "agency problem Type II" is originated from the conflict of interest between concentrated majority and diverse minority shareholders (Bhaumik and Gregoriou, 2010).
The role of the board is to reduce the potential agency problem and the vulnerability of corporate expropriation through monitoring, representation and oversight responsibilities.
However this theory does not take into account the enterprise agency problem. The key assumption concerning the agency problem, at the private enterprise level, is that private ownership is associated with a more effective incentive structure than public ownership; and there will be less scope under private ownership for managers and workers to pursue their own objectives at the expense of the shareholders.
Ideally, the contract between the CEO and the stockholders should resolve the agency problem. However, even with the most appropriate design and intent, a contract which details the CEO's duties and the permissible boundaries of actions is ultimately second-best.
Firm with high Family ownership has a unique agency problem which is associated with shareholders who also invest in the company.
The empirical research was conducted in the investigation of the dividend policy and related agency problem which arises between Management and Owners of the firm.
The theoretical approach to deal with the agency problem can be divided into two broad groups.
The relevant agency problem in widely held firms is not the one between controlling owners and minority shareholders but, rather, between professional managers and shareholders (Jensen and Meckling, 1976).
The authors find empirical evidence that audit quality is beneficial in mitigating the agency problem in firms by making executive compensation more responsive to accounting-based performance.
Other authors, however, believe that greater diversification with greater concentration of ownership is not to reduce risk but because the majority shareholders (who are in turn the firm's managers) are seeking greater profits and benefits even if it is at the expense of the wealth of minority shareholders (this is known as tunnelling, which is defines as the transfer of firm assets and profits to controlling owners) (agency problem type II) [15], [39], [43], [47], [74].

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