Agency problem
Definition
The agency problem arises when there's a conflict of interest between the management (agents) and the shareholders (principals) of a corporation. This issue can lead to managers making decisions that benefit themselves at the expense of shareholders.
5 Must Know Facts For Your Next Test
- The agency problem is often addressed through incentive schemes like stock options.
- Corporate governance mechanisms such as boards of directors help mitigate agency problems.
- Monitoring costs are incurred by shareholders to oversee managerial actions.
- Agency problems are more likely in companies with dispersed ownership.
- Regulations and laws, like Sarbanes-Oxley Act, aim to reduce agency conflicts.
Review Questions
- What is the primary cause of the agency problem?
- Name one method used to align the interests of managers and shareholders.
- How do corporate governance mechanisms help in mitigating the agency problem?
"Agency problem" appears in:
Related terms
Principal-Agent Relationship: A relationship where one party (agent) acts on behalf of another party (principal).
Corporate Governance: The system by which companies are directed and controlled, involving regulations and practices.
Incentive Alignment: Strategies used to align the interests of agents with those of principals, such as performance-based bonuses.
