How To Solve Agency Problem

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The less company stocks the managers own, the more likely conflicts of interests will occur (Brigham & Ehrhardt, 2003).

The solution to the shareholders-managers agency problem is aligning the interests of managers with those of the shareholders, forcing them to work in a way that maximizes shareholders’ wealth.

The debtholders give loans to the firm and get returns from firm’s cash flow in the form of interest payments.

The interest rate applied for each loan is calculated based on the existing risk level of the firm at the time the loan is issued.

In the financial field, there are two primary types of agency problems: between shareholders and managers, and between equityholders and debtholders (Brigham & Ehrhardt, 2003).

First, I address the agency problem between shareholders and managers.For years, many scholars and practitioners have contributed their time, knowledge, experiences in researching, and published many papers about agency problems.They recommend and also prove these recommendations through empirical tests on how to mitigate the costs from agency problems and enhance the firm’s performance. Google(); req('single_work'); $('.js-splash-single-step-signup-download-button').one('click', function(e){ req_and_ready('single_work', function() ); new c. Disclaimer: This work has been submitted by a student.In case the risky project is successful, debtholders will not receive more returns because their income is fixed.However, if that project fails, debtholders have to share the risks.If the owner sells a part of his ownership to outsiders, the owner-manager will not possess 100% of the company and a conflict of interests occurs.The insider manager/owner will not behave in a way that maximizes the company’s wealth and will have a tendency to take advantage, consuming for his personal desire at company’s expense.When a company is set up, the founder is the owner and manager.He will act on behalf of himself to create more wealth.

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