What is the agency problem in corporate finance?
Oct 08, 2020 · In a public stock company, senior executives, such as the CEO, face agency problems when they delegate authority of strategic business units to general managers. they decide to get involved in the day-to-day operations of a company. the board of directors possesses more information about the company than they do. the firm designs work tasks, …
What authority does the stockholders expect Joaquin to have?
In a public stock company, senior executives, such as the CEO, face agency problems when A) they delegate authority of strategic business units to general managers. B) they decide to get involved in the day-to-day operations of a company. C) the board of directors possesses more information about the company than they do.
What action should Sanjaya take to determine whether the firm is now acting ethically?
In a public stock company, senior executives, such as the CEO, face agency problems when: they delegate authority of strategic business units to general managers. they delegate authority of strategic business units to general managers .
Should board members support the CEO of a publicly traded company?
In a public stock company, senior executives, such as the CEO, face agency problems when: the goals of the principals and agents are not aligned with each other. The conflict in a principal-agent relationship arises when:
Which of the following is a major issue at the forefront of CEO compensation?
Which of the following is a major issue at the forefront of CEO compensation in recent years? the strong relationship between executive compensation and company performance.
What does limited liability for investors imply in a public stock company?
What does "limited liability for investors" imply in a public stock company? Shareholders who provide the risk capital are liable only to the capital specifically invested.
Which of the following is a major drawback of public stock companies?
A major drawback of public stock companies, according to Michael Porter & others: They prioritize financial performance over all else.
What are the four characteristics of a public stock company that make it an attractive corporate form quizlet?
The public stock company enjoys four characteristics that make it an attractive corporate form:Limited liability for investors.Transferability of investor ownership.Legal personality.Separation of legal ownership and management control.
Which of the following is a characteristic of a public stock company?
The characteristics of a public company are that they are limited by shares and have limited liability. 'Limited by shares' means that shares in the company can be bought and sold freely (shares are featured in the stock-exchange).
What best describes transferability of investor ownership in a public stock company?
What best describes transferability of investor ownership in a public stock company? Shareholders own stocks but do not run the company.
What are the disadvantages of a public company?
Some of the disadvantages of operating a public corporation include:Difficult to manage.Risk of producing inefficient products.Financial burden.Political interference.Misuse of power.Consumer interests ignored.Expensive to maintain and operate.Anti-social activities, i.e., charging too much for a product.
What are the disadvantages of being a public company?
The Process Can Be Expensive. Going public is an expensive, time-consuming process. ... Pay Attention to Equity Dilution. ... Loss of Management Control. ... Increased Regulatory Oversight. ... Enhanced Reporting Requirements. ... Increased Liability is Possible.
What are the disadvantages of a public limited company?
Disadvantages of being a PLC include:it is expensive to set up, requiring a minimum set up cost of £50,000.there are more complex accounting and reporting requirements.there is a greater risk of a hostile takeover by a rival company as the company cannot control who buys its shares.More items...
Which of the following is a major drawback of public stock companies according to Michael Porter and multiple choice question?
Which of the following is a major drawback of public stock companies, according to Michael Porter and others? They prioritize financial performance over all else.
What are the main purposes of corporate governance quizlet?
The objectives of a corporate governance system are 1) to eliminate or mitigate conflicts of interest among stakeholders, particularly between managers and shareholders, and 2) to ensure that the assets of the company are used efficiently and productively and in the best interests of the investors and other ...
Who is principal in agency theory?
Agency theory is a concept used to explain the important relationships between principals and their relative agent. In the most basic sense, the principal is someone who heavily relies on an agent to execute specific financial decisions and transactions that can result in fluctuating outcomes.
What industry does Thomás work in?
industry-specific forces. Thomás works in a rare metals industry and wants to open a business in a foreign country that is rich with natural resources. He believes that natural resources are the one and only mechanism that can help him achieve an international competitive advantage. After all, countries like Afghanistan, Iran, ...
What is Piper Inc?
Piper Inc. is a large cosmetics company that made an initial small investment in a start-up company, Oscorp, which was developing an organic face lotion. This gave Piper controlling interests in the start-up company. However, Oscorp soon began to have financial difficulties because of principal-agent problems.
What was the mode of entry into foreign markets during the period of Globalization 1.0?
During the period of Globalization 1.0, the mode of entry into foreign markets primarily involved. exporting goods. Walmart sells live animals (snakes, eels, toads, etc.) for food preparation in China whereas IKEA sells kimchi refrigerators and metal chopsticks in South Korea.
Why must Kate be held to the highest ethical standards?
They must hold her to the highest ethical standards because the leaders of publicly traded companies must withstand intense public scrutiny. Kate is the CEO of a firm. She has an opportunity to increase the competitive advantage of her company but is not sure if accepting the opportunity is ethical.
Why is horizontal integration necessary?
It is necessary for government authorities such as the Federal Trade Commission (FTC) and/or the European Commission to approve any large horizontal integration activity because. the horizontal integration activity has the potential to reduce competitive intensity in an industry.
What are the downsides of equity alliances?
The downside of equity alliances is. the amount of investment that can be involved. The Hershey Company, the largest U.S. chocolate manufacturer, decided to enter the Chinese market because. the U.S. population was growing slowly and becoming more health conscious.
Why did the acquisition fail to create the anticipated synergies?
However, the acquisition failed to create the anticipated synergies because the managers' capabilities were restricted to the airline industry.
What is the challenge of managing information asymmetries?
While CEOs typically know more about the company than the board or external stakeholders, they often know less about individual business lines than division managers. The key to success is to be informed without micromanaging.
Who is the CEO of Husky Energy?
Rob Peabody, CEO of Husky Energy, described the process of “managing out” as being able to “write your own scorecard”— with opportunities to build support for long-term goals and patience among investors.
Who is Patrick Foley?
Patrick Foley is senior advisor to Marakon Management Consulting at CRAI, a professional services group with headquarters in Boston, USA, and London, England, and former Chief Economist and Group Strategy Director at Lloyds Banking Group in London.
How much did Enron lose in bankruptcy?
When Enron declared bankruptcy, shareholders lost nearly $75 billion in value. Enron became the largest U.S. bankruptcy at that time with its $63 billion in assets.
What happened to Enron shareholders?
When Enron declared bankruptcy, the largest U.S. bankruptcy at that time, shareholders lost nearly $75 billion in value. Although Enron's management had the responsibility to care for the shareholder’s best interests, the agency problem resulted in management acting in their own best interest.
Why did Enron file for bankruptcy?
In 2001, energy giant Enron filed for bankruptcy. Accounting reports had been fabricated to make the company appear to have more money than what was actually earned. The company's executives used fraudulent accounting methods to hide debt in Enron's subsidiaries and overstate revenue. These falsifications allowed the company’s stock price to increase during a time when executives were selling portions of their stock holdings.
What is an incentive fiduciary?
A fiduciary is an agent that acts in the principal's or client's best interest.
How can an agency problem be minimized?
The agency problem may also be minimized by incentivizing an agent to act in better accordance with the principal's best interests. For example, a manager can be motivated to act in the shareholders' best interests through incentives such as performance-based compensation, direct influence by shareholders, the threat of firing or the threat ...
How can principals affect an agent's compensation?
Principals can also alter the structure of an agent's compensation. If, for example, an agent is paid not on an hourly basis but by the completion of a project, there is less incentive to not act in the principal’s best interest. In addition, performance feedback and independent evaluations hold the agent accountable for their decisions.
How is an agent motivated?
An agent may be motivated to act in a manner that is not favorable for the principal if the agent is presented with an incentive to act in this way. For example, in the plumbing example, the plumber may make three times as much money by recommending a service the agent does not need. An incentive (three times the pay) is present, ...
Who owns Hollinger International?
Conrad Black, Hollinger International. Canadian Conrad Black created Hollinger Inc., the parent company of Hollinger International, in the mid-1980s with the purchase of the controlling interest in the Daily Telegraph, a British newspaper.
Do CEOs have to maintain high ethical standards?
CEOs have always been expected by shareholders and investors to maintain high ethical standards. Although it doesn't always happen, today's regulatory environment makes it easier to identify transgressions and bring violators to justice.