Research and provide an example of a company that has any kind of agency conflict. Describe...

Research and provide an example of a company that has any kind of agency conflict. Describe the company, the situation in which they were used, and the financial implications of raising the conflict.

-JG

Expert Solution

The example of an agency conflict was evident in the case of Lehmann brothers and its subsequent downfall in 2008. The managers and executives in the financial company took huge risks and increased the leverage of the company to report short term profits. This was done from a perspective of getting higher pay outs as bonuses. However the resulting excessive leverage lead to the eventual downfall of the financial institution when the derivative markets crashed. This lead to its share value crashing and erosion of wealth for the shareholders of the firm.

Thus the agency conflict was between the managers of the firm and the shareholders (owners of the firm) wherein the managers did not discharge their fiduciary duties towards the shareholders in an ethical manner and hence this lead to an agency conflict.

The financial implication of the conflict was that while managers got large bonuses by showing huge profits in the short term, the shareholders’ wealth got wiped out when the firm failed due to excessive leverage.

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