Agency Costs and Agency Problems

Added on -2020-02-18

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Running head: AGENCY PROBLEMS Agency ProblemsName of the StudentName of the UniversityAuthor note
1AGENCY PROBLEMSExecutive summaryThe main purpose of this report is to highlight that, how the agency costs and agencyproblems are related to the relationships between the owner-manager and lender-manageragency utilizing the agency theory. The report further highlights thoroughly the relationbetween lender and a manager and on the other hand relation between manager and ownerunder the light of agency theory.
2AGENCY PROBLEMSTable of ContentsIntroduction................................................................................................................................3Agency theory............................................................................................................................3Monitoring costs.....................................................................................................................4Bonding Costs........................................................................................................................4Residual costs.........................................................................................................................5Manager-lender agency relationship..........................................................................................5Excessive dividend payments................................................................................................6Underinvestment....................................................................................................................6Owner Manager Relationship....................................................................................................7Responsibility of the managers..............................................................................................7Responsibility of the agents...................................................................................................7Control mechanism................................................................................................................8Employee ownership..............................................................................................................8Social responsibility...............................................................................................................8Termination............................................................................................................................9Conclusion..................................................................................................................................9References................................................................................................................................10
3AGENCY PROBLEMSIntroductionThe purpose of this report is to explore the agency costs and agency problems relatedto the relationships between the owner-manager and lender-manager agency using the agencytheories. It can be said that Agency Theory describes the way to best organize relationships inwhich an individual party determines the job when another party completes the job. It is amatter of fact that in this relationship the principal employs an agent for the completion of thework or to do the work while the principal is unable to do the work (Berrone, Cruz andGomez-Mejia 2012). For an example, it can be said that, in some corporations principals arethe stakeholders of the organization entrusting the agents, which means the managerial bodyof the organization does the work on behalf of them. In short, it can be said that Agencytheory is related to the relation between the principal and the agent who are employed or areindependent contractors (Block 2012). This is a utilitarian framework designed for thegovernance and controls in the organizations. This idea provides a logical introduction of thetopic by evaluating the strengths and weaknesses and also uses various case studies to portrayhow the theory has been applied in various organizations.Agency theoryAgency theories are in most cases used to know the relationship where an individualor a group of persons try to employ service of the agents for performing some activities ontheir behalf. While doing so, principal delegates the decision taking authority to the agent andthis is widely known as agency relationship. The agent has s legal duty to act for the bestinterests of the principal and the both parties assume that utility maximizers mean that agentwould not always act for the best interest of the principal and the risks that the managers mayundertake necessary actions those are detrimental towards the owners or towards the otherprincipals are in most cases termed as moral hazard (Ballwieser et al. 2012). Whenever the

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