Question

Is there any survey evidence that suggests that there is an agency conflict between shareholders and managers when it comes to dividends? Can the answers be interpreted differently?

Answer 1

Agency Problem

An agency problem is a conflict of interest inherent in any relationship where one party is expected to act in another's best interests. In corporate finance, the agency problem usually refers to a conflict of interest between a company's management and the company's stockholders. The manager, acting as the agent for the shareholders, or principals, is supposed to make decisions that will maximize shareholder wealth even though it is in the manager’s best interest to maximize his own wealth.

Agency problem is a conflict of interest inherent in any relationship where one party is expected to act in another's best interests. In corporate finance, the agency problem usually refers to a conflict of interest between a company's management and the company's stockholders. The manager, acting as the agent for the shareholders, or principals, is supposed to make decisions that will maximize shareholder wealth even though it is in the manager’s best interest to maximize his own wealth.

There are various factors responsible for conflicts between managers and shareholders

1. Managers prefer greater levels of consumption and less intensive work, as these factors do not decrease their remuneration and the value of the company’s shares that they own. 2. Managers prefer less risky investments and lower financial leverage, because in this way they may decrease the danger of bankruptcy, and avoid losses on their managerial capital and portfolios. 3. Managers prefer short-term investment horizon.

4. Managers avoid problems stemming from reductions in employment levels, which increase with the changes in control of a company.

So, agency problem arises because of various factors not only for dividend and incentive problem.

The agency problem may also be minimized by incentivizing an agent to act in better accordance with the principal's best interests. For example, a manager can be motivated to act in the shareholders' best interests through incentives such as performance-based compensation, direct influence by shareholders, the threat of firing or the threat of takeovers. Principals can also alter the structure of an agent's compensation. If, for example, an agent is paid not on an hourly basis but by completion of a project, there is less incentive to not act in the principal’s best interest. In addition, performance feedback and independent evaluations hold the agent accountable for their decisions.