Agency problem and its solutions

Principal-agentive role relationship occurs when a head teacher contracts an agent. The principal hires the agent to perform a service for him or to act on his behalf. For example, in a large corporation, shareholders would hire double-deckers to help them to organize the social club in dairy business. However, fashion problems may arise because of the conflict recreate and imbalance information surrounded by principals and agents, which bring to assurance be. In this essay, I would same(p) to use the histrionics theory introduced by Jensen and Meckling (1976) to analysis that to what extent that agency cost would damage shareholders wealth maximization and what actions shareholders could defecate to correct it.Agency problems and main causes of itFirst of all, in that respect might to conflicts of interest or different goals amid principals and agents, the agent would act as their best egoism but not principals. Secondly, there is asymmetry information between princ ipals and agents, directors may have more information than principals or they could hide their actions. Thirdly, there is uncertainty in the outcome. The outcome may not just front on managers effort but also other factors like untroubled luck or high markets expectation trio to increase in share price.Agency beAgency cost incurred when the managers do not movement to maximise firms value and the cost to monitor manager and constrain their behaviours. Agency cost is the sum of three types of costs, cost of calculative the contract, cost of enforcing the contract (monitoring and bonding) and residual loss if contract is not optimal.Solutions of agency problems Monitoring Management compensation Incentive compensationThere are two study principal agent model, adverse plectron and moral hazard. Adverse filling occurs when one of the parties, usually theagent, has better relevant information prior to the contract. This orphic information will be used opportunistically to opti mize the utility gained from debut the contract. In moral hazard the principal is unable to observe the agents actions later on(prenominal) signing the contract. This causes the agent not to take the full consequences of his actions and thus he can use this orphic information to act opportunistically and maximize his cause profit. In most cases the principal will have to carry the costs of this behaviour.Agency problem and its solutionsIntroductionPrincipal-agent relationship occurs when a principal contracts an agent. The principal hires the agent to perform a service for him or to act on his behalf. For example, in a large corporation, shareholders would hire managers to help them to organize the company in dairy business. However, agency problems may arise because of the conflict interest and asymmetry information between principals and agents, which lead to agency costs. In this essay, I would like to use the agency theory introduced by Jensen and Meckling (1976) to analysi s that to what extent that agency cost would damage shareholders wealth maximisation and what actions shareholders could take to correct it. Agency problems and main causes of it.First of all, there might to conflicts of interest or different goals between principals and agents, the agent would act as their best self-concern but not principals. Secondly, there is asymmetry information between principals and agents, managers may have more information than principals or they could hide their actions. Thirdly, there is uncertainty in the outcome. The outcome may not just play on managers effort but also other factors like cheeseparing luck or high markets expectation lead to increase in share price.Agency costsAgency cost incurred when the managers do not seek to maximise firms value and the cost to monitor manager and constrain their behaviours. Agency cost is the sum of three types of costs, cost of invention the contract, cost of enforcing the contract (monitoring and bonding) and residual loss if contract is not optimal.Solutions of agency problems Monitoring Management compensation Incentive compensationThere are two major principal agent model, adverse selection and moral hazard. Adverse selection occurs when one of the parties, usually theagent, has better relevant information prior to the contract. This hidden information will be used opportunistically to optimize the utility gained from entrance the contract. In moral hazard the principal is unable to observe the agents actions after signing the contract. This causes the agent not to take the full consequences of his actions and thus he can use this hidden information to act opportunistically and maximize his sustain profit. In most cases the principal will have to carry the costs of this behaviour.