Business

Question 1: a.

Principal-agent conflicts between avouchers and omnibuss because the interests of managers are not by and large aligned with those of owners. The owners¡¯ interests are to maximize their own wealth. The managers are their agents, chartered to make decisions on the owner¡¯s behalf. They only own small fraction of the inviolable¡¯s equity, which provides them with petty inducing to maximize staunch¡¯s value. So, facing the very little equity owned, the managers have strong incentives to consume perquisites. If significant benefits associated with the come across of a corporation, including a large salary, office perquisites, and prestige, those self-interested managers will prejudice their decisions about the firm¡¯s financing and investments to preserve their manipulate and enhance their benefit. Such as managers may choose for the firm to invest in projects where the manager¡¯s personal relationships with other(a) parties to the project are critical to the project¡¯s triple-crown completion. The manager at the retiring age might not be willing to take a big long-run +NPV investment project if their bonus, stipend scheme is closely cogitate to the performance of the year. The huge initial investment might bend current year¡¯s profitability, which results the decrease in the manager¡¯s income. As above, in making decisions, managers would make throw off among three constituencies. They would not try to maximize stockholder value only. Consequently, the conflicts between the parties occur.

b.



(i) Monitoring by financial institutions.          situate debt is widely held, it can eliminate the free-rider problems especially in reducing the free-rider problem with respect to monitoring the firm¡¯s management. alike it makes the bank has strong incentive to monitor the firm¡¯s performance, which indirectly reduces owner-manager agency costs.

(ii) Monitoring by large ¡°block-holders.¡± heavy(p) shareholders have sufficient incentive to actively monitor firm management and also have better and cheaper access to knowledge about the firm, even...

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