Cost Of Agency Essay

1770 Words 8 Pages
What are agency problems? What are the cost of agency problems? Why may stock-based compensation alleviate the problems? What concerns have been arisen?

Agency is when the stockholders (principals) hire managers (agents) to run the company. Agency problems is the conflict between the goals of firm`s owners and its managers. The problem is when the managers who is supposed to make the decision that would best serve the principals is naturally motivated by self-interest benefits (Investopedia, 2015).
Example: suppose a manager must travel necessitating the expenses associated with hotel stay. If the owner allows the manager to arrange their travel itinerary, an agency problem can occur of the managers spends more on the hotel than is necessary
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The cost monitoring agent to avoid moral hazard are often too high to justify the expenditure. Some loses due to an agent’s self-interested behavior can be expected as a normal cost of doing business. . The incremental benefits of putting perfect monitoring in place usually does not outweigh the losses. Alternatives to monitoring can be in the form of incentives, bonuses, stock options, and commissions (Garger, 2010)

What is the difference between book value and market value? Although the textbook suggests us to use market value for decision-making purposes, what are the potential problems of market value? Book value is the price you paid for a particular asset, the value at which an asset is carried on a balance sheet and market value is the current price at which you can sell an asset (Investopedia, 2013).

Market value is the piece at which the asset can be bought or sold. Market value is the highest price a willing buyer would pay and a willing seller would sell for. In a market value the price good the asset does not always increase. For example when you buy a house for $200,000 but the current market value of the house can increase or

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