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an agency relationship and potential agency problems

Posted by shamser On Wednesday, June 30, 2010 0 comments

an agency relationship is a contract under which one or more people hire another person to problem some series and delegates decision authority to that agent. agent problem or relationship may be defined as a potential conflict for own interest between stockholder versus managers and stockholders versus creditor. stockholders and managers. a potential agency problem arise whenever the owner and manager represent different existence and the manager of a firm owns less than hundred percent of the firm,s common stock , then a potential conflict of interest immediately arise. the manager wants to take high salary or enjoy more perquisites and not work hard to maximize shareholder wealth because part of those cost will fall to the outside shareholders and less of this wealth get to him or her. this potential conflict of interest exist between two parties the outside shareholder and the agent following ways can solve such type of agency problems
  • provision of cash find incentives to managers.
  • provision of stock option and stock bonus.
  • limitation of managerial autonomy.
  • setting up a monitoring unit.
  • reorganization of the managerial structure.

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