Answer to Question #56223 in Finance for Alexander
• When managers own less than 100% of the firm's common stock.
• When managers can make decisions that makes a conflict with the best interests of the shareholders.
Agency problems have some disadvantages and negative consequences. There are such popular of them:
• Most managers on average are highly paid. Therefore for the share plan to be attractive it must consist of substantial number of shares.
• The plan assumes managers rationality i.e. that their marginal utility for an extra shilling increases indefinitely. This is not always the case.
• Possibilities of over emphasizing on wealth maximization in the short run without considering the long run financial implications.
• Possible conflict between the medium level mangers and the CEO where the former feels that they are not being considered for the senior most positions in the company and that can lead to conflict of interests which can jeopardize the ultimate goal and others.
When the shareholders try to maximize their own interest’s they incur additional costs. These costs are called monitoring costs. The shareholders should make less them.
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