Question

Define each of the following terms:
a. Agent; principal; agency relationship
b. Agency cost
c. Basic types of agency conflicts
d. Managerial entrenchment; nonpecuniary benefits
e. Greenmail; poison pills; restricted voting rights
f. Stock option; ESOP

Answer 1

a. 1)Agent :- An agent is any person who has been legally empowered to act on behalf of another person. Agents are employed to represent their client in negotiations or dealing with third parties. Stockbroker or agent are hired by investors to make investment decisode relating to the stock market.

2) Principal :- The principal is someone - an individual,a corporation,a partnership with the legal authority to make certain decisions or actions.If the principal empower someone else to make the decisions,that person becomes the agent. The principal is responsible for the action of the agent taken in furtherance of duties or as per the instruction of principal.

3)Agency relationship :- The principal and agent create an agency relationship. This is a business relationship where a principal gives legal authority to an agent to act on principal's behalf when dealing with a third party. Principal is responsible for the action of the agent. An agency relationship is a fiduciary and consensual relationship.

b. Agency cost :- agency cost are a type of internal cost that arises from, or must be paid to, an agent acting on behalf of the principal. These cost arises because of the core problems such as conflicts of interest, conflicts between shareholders (principal) and manager(agent).

c. Basic types of agency conflicts :- 1) Conflicts between firm's owner/shareholders (principal) and it's hired manager (agent)

2) Conflicts between creditors (principal) and shareholders (agent).

d. 1) Managerial entrenchment :- It occurs when managers gain so much power that they are able to use the firm to further their own interests rather than the interest of the shareholders.

2) Non pecuniary benefits :- A worker's remuneration package may include items which are provided as a non-pecuniary benefits.Non-pecuniary benefits is a benefit that a worker receive as '''payment in kind' rather than as a monetary amount.

e. 1) Green mail :- green mail is money paid to an entity to stop or prevent aggressive behavior.In mergers and acquisition,it is an anti-take over measure in which the target company pays a premium known as Green mail to purchase it's own stock shares back at inflated prices from a corporate raider.

2) Poison pills :- A shareholder rights plan, colloquially known as Poison pills. It is a type of defenaide tactic used by a corporation's board of directors against takeover.Typically such plan gives shareholders the right to buy more shares at discount.

3) Restricted voting rights :- The company can place certain restrictions on the voting rights of an shareholders.For eg. there will be a restrictions on voting rights of shares on which a call or one time sums at the moment liable to be paid has not been paid.

f. 1) Stock option :- stock options are sold by one party to another that give the option buyer the right,but not the obligation ,to buy or sell a stock at an agreed-upon price within a certain period of time. A call option is when the buyer has the right to purchase stock at a specified price before the option expires. A put option is where the buyer has the right to sell stock at specified price before expiration.

2)ESOP :- An employee ownership plan is a qualified defined contribution employee benefit plan designed to invest primarily in the sponsoring employer's stock. ESOP's sponsoring company, the selling shareholders and participants receive various tax benefits. Company often use ESOPs as a corporate finance strategy and to align the interest of their employee with those of their shareholders.