What are principal - agent interaction (for publicly traded co)? a. What should be the goal...

What are principal - agent interaction (for publicly traded co)?

a. What should be the goal of agents (managers) in that context? Explain.

b. What are some of the concerns that managers will not pursue that goal? Explain c. How can we be sure that managers make decisions to reach that goal? Explain.

Solutions

Expert Solution

1. The goals of managers are as follows-

A. Prioritise the interest of the principles of the company and maximize the shareholders wealth

B. Reduce the risk on the part of the shareholder and provide them with higher capital yield and dividend yield

C. Make decisions which are in interest of the shareholders

2. Some of the concerns that manager will not be pursuing the goal will be related to prioritising managers own interest in contrast with the interest of the shareholders of the company because managers will be trying to report higher profits and they can even manipulate book of account and they can engage into bad accounting practices and take higher risk which are not in accordance with the shareholder interest and It can lead to risking the overall shareholders capital.

3. we can make sure that manager will be taking decision in order to reach the goals of the shareholders by providing all the resolution for the principal and agent conflict and providing the managers with the highest salaries and providing them with stock compensation and providing them with performances related payments so that they will be satisfied and acting in the synchronisation with the goals of the shareholders.

jeff jeffy answered 2 years ago

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