The Agency Problem
INTRODUCTION
The preliminary and primary goal of a company is to maximize its firm value, in other words, to maximize the shareholders’ wealth. As a good instrument tool of measuring the firm value or the operation condition of a company, the share price indicates the stock market value of the company’s shares. Shareholders always expect to maximize the share price by corporate governance, however, managers in company always link their attitude to the their own interest, and they would not to try their best to achieve shareholder’s goal. Due to different interests in shareholders and managers, the conflicts always exist between them. An agency problem occurs when the interests of stockholders, the board of directors, and/or the management of the company are not perfectly aligned or when these entities conflict.
EXPLAINATION
Agency problem is typically caused by two reasons which are asymmetric information and hidden action. There is no legitimate theoretical or moral objection to those who assert that the goals of the modern corporation should be to serve the broad interests of all stakeholders rather than to serve the narrow interests of just the shareholders. In a large company, the principle refers to the shareholders of the company and the agent refers to the managers who is the subordinates in the company. Due to the separation of the ownership, managers are always responsible for the more detailed jobs (including job planning, supervising the sales ),the owner of the company do not have to supervise all the business in firm and managers sometimes would maximize their own profit. The behaviour mentioned before is hidden action. Moreover, managers have to run the company on a day-to-day basis, hence they hold more information related to the jobs or tasks. This will lead to different strategies and tactics made by managers, and managers could attach the documents such as financial reports and the accounting data but the shareholders
The preliminary and primary goal of a company is to maximize its firm value, in other words, to maximize the shareholders’ wealth. As a good instrument tool of measuring the firm value or the operation condition of a company, the share price indicates the stock market value of the company’s shares. Shareholders always expect to maximize the share price by corporate governance, however, managers in company always link their attitude to the their own interest, and they would not to try their best to achieve shareholder’s goal. Due to different interests in shareholders and managers, the conflicts always exist between them. An agency problem occurs when the interests of stockholders, the board of directors, and/or the management of the company are not perfectly aligned or when these entities conflict.
EXPLAINATION
Agency problem is typically caused by two reasons which are asymmetric information and hidden action. There is no legitimate theoretical or moral objection to those who assert that the goals of the modern corporation should be to serve the broad interests of all stakeholders rather than to serve the narrow interests of just the shareholders. In a large company, the principle refers to the shareholders of the company and the agent refers to the managers who is the subordinates in the company. Due to the separation of the ownership, managers are always responsible for the more detailed jobs (including job planning, supervising the sales ),the owner of the company do not have to supervise all the business in firm and managers sometimes would maximize their own profit. The behaviour mentioned before is hidden action. Moreover, managers have to run the company on a day-to-day basis, hence they hold more information related to the jobs or tasks. This will lead to different strategies and tactics made by managers, and managers could attach the documents such as financial reports and the accounting data but the shareholders
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