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Principles of Financial Investment
Finance & Accounting
Pages 10 (2510 words)
Principles of Financial Investment Introduction In corporate sector a relationship of agency exists. Shareholders contributing to the capital of the company are mostly large in numbers, particularly when the structure is that of public company. They are the owners and it is difficult for them mange the day to day affairs of the company…
The effects of these agency problems create agency costs that work against the benefit of all stakeholders as well as for the company. This write up identifies those agency problems, its agency costs, and enumerate the ways to mitigate the agency costs in order to provide maximization of wealth of stakeholders as well as for the benefit of management and the company itself. Definition of agency problem The nature of conduct of business in respect of proprietorships, partnerships, and cooperative societies is that those are owner- managed organizations. But in case of companies the share holders, who are the owners of the companies, are not involved in the management of the affairs of the company. The management of the company is conducted by board of directors. Directors may or may not be professionally trained but they have little or no stake in the ownership of the firm. It is true that there are certain compelling reasons for separation of ownership and management, but a separate structure leading to conduct of management through the agency of board of directors leads to conflict of interest between managers (agents) and the shareholders, who are owners of the company. Therefore the agency problems emerge from this separation of ownership and control. ...
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