Question

1. Unique manifestations of agency problems in global market and how to mitigate the agency issue.

Answer 1

Manifestations of agency problems in global market-

1. Firm value reduction

2. Value destroying acquisitions.

3. Excessive executive compensations.

Agency problem arise due to conflict of interest between managers and shareholders. Or can arise when the managers make decisions according to their own interest.

Agency problem is there when there is discrepancy between the management and shareholders. Also imperfect financial market conditions and weaknesses in the legal systems also results in the agency conflicts.

So it is very important to control the agency problem as this can lead to the following things-

1. Waste of scarce resources

2. Hamper capital market function

3. Declining economy growth.

So to mitigate the agency issue, there must be an effective management of the agency problem which includes monitoring of the agent’s work.

Some internal and external measures to control agency problems are

1. Internal audit- It is one of the internal measure to control the agency problem that helps to evaluate the overall efficiency of the company and also protect the assets and the capital.

2. Managerial payments

3. Corporate governance- It is also one of the internal measure to control the agency problem that enables efficient control of the companies. A good system of corporate governance makes transparency and control within the decision making process.

4. Shares market price.

5. Engaging in external audit- It is one of the external measures that controls and prevent the agency problem and also can help controlling the work of the managers.