In large multinational firms with professional management which one below reduces agency costs? Separation of management...

In large multinational firms with professional management which one below reduces agency costs?

		Separation of management from control
		Separation of decision management from decision control
		Separation of risks between market and business
		Separation of foreign exchange risk from business risk

Solutions

Expert Solution

Correct Answer: Option A)Separation of management from Control

Reasoning:

Agency cost as the name suggests is the cost incurred by the company due to conflict of interest between the shareholders and the management of the firm. In simpler terms, management(Principal) is assumed to influence the agent(Working managers) to make decisions in favor of the principal ignoring other shareholders.

Since it is an internal cost it can be reduced by limiting the management(principal) from controlling the daily operations of the company. Therefore the first option is correct.

Separation of decision management from decision control will not impact the agency cost of the firm as decision control is meant to be taken by the decision management only. Similarly, Business risk and Market risk are already well separated for companies and is not the correct option.

Also, Separation of foreign exchange risk from business risk is not possible in real terms. The exposure to such risk can only be reduced by proper hedging techniques. However the same has no relation pertaining to internal cost or the Agency cost.

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jeff jeffy answered 2 years ago

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