PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Question
Chapter 33, Problem 17PS
a)
Summary Introduction
To explain: The reason why it is not possible for managers to give 100% importance to shareholders interests and none of it to their own.
b)
Summary Introduction
To list: The mechanism used around the world to keep the agency problems under control.
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Which of the following is an example of the agency problem?
a.
Managers always invest in projects that have appropriate returns and that will increase shareholder wealth.
b.
Managers resign when they believe they have not always acted in the best interests of shareholders.
c.
Managers conduct an acquisition program purely to increase the size of an organisation.
d.
Managers look for new projects as they want to avoid business risk.
Clear my choice
Corporate governance is defined as "the set of laws, rules, and procedures that influence the company's operations and the decisions its managers make." Agency costs are "the reductions in a company's value due to actions by agents (managers), including the costs principals (shareholders) incur (such as monitoring costs) trying to modify their agents' behaviors." Corporate governance provisions are set in place as way to help minimize the agency conflict within a firm. Not one provision alone completely eliminates the potential for all agency conflict. As a result, multiple governance provisions are typically in place at a firm to help minimize the risk.
The book lists 5 common internal governance provisions:
monitoring and discipline (threat to fire) by the board of directors
charter provisions and bylaws that affect the likelihood of hostile takeovers (remember that in general: shareholders like hostile takeovers, managers do not)
compensation plans
capital structure choices…
Hi, on what does it depend if this statement is true or false?
"According to the organizational behavior theory, centralizing business activities is the most efficient solution to increase a company’s WACC"
Knowledge Booster
Similar questions
- 2. Agency theory is based on the view that A. The purpose of corporate governance (CG) should be to satisfy (as far as possible) the objectives of all stakeholders. B. Boards of directors are considered as important mechanism for reducing transaction costs associated with environmental interdependency. C. Corporate governance will be to employ or design techniques or systems that can secure the interests and values of the management. D. The system of CG should be designed to minimise agency problems & costs.arrow_forwardDefine agency problems, and describe how they give rise to agency costs. Explain how a firm’s corporate governance structure can help avoid agency problems.arrow_forward1. Cite specific examples of risk avoidance, Reduction, Transfer and Retention? 2. What is the significance of internal control in an organization? Cite an example of a company that failed due to IC deficiency?arrow_forward
- Explain why it would be problematic for Company not to comply with good corporate governance principles.arrow_forwardCorporate Social Responsibility In his book Capitalism and Freedom, economist Milton Friedman wrote on page 133: “There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it . . . engages in open and free competition, without deception or fraud.” Required: Explain why you agree or disagree with this quote.arrow_forward“Performance reports based on controllability are impossible. Nobody really controls anything in an organization!” Do you agree or disagree? Explain your answer.arrow_forward
- Which statement best describes the essence of the Agency Problem? Shareholders allocate decision-making authority to the managers, who might act dishonestly or guard their own self-interest. Managers and shareholders always have aligned interests and goals. Managers always act in the best interest of shareholders. Shareholders retain all decision-making authority.arrow_forwardThe tension between the interests of the CEO and the interests of long-term stakeholders helps to explain why: Group of answer choices A. Conflicts of interest can easily happen. D. Both A & B B. Boards of directors need to maintain their independence from executives. C. Absence of agency risk is apparent.arrow_forwardCorporate governance is concerned with: a) Minimizing the firm's costs. b) Maintaining the smooth operation of the firm. c) Aligning the goals of management with the goals of shareholders. d) Developing and marketing new products. e) Government regulation of corporations. 6.arrow_forward
- Why is the agency problem more pronounced for multinational corporations? Check all that apply: MNCs are often larger than purely domestic companies. There are no international laws to prevent agency problems. Monitoring managers in foreign countries is more difficult. Managers raised in different cultures may have different goals and values.arrow_forwardWithin the context of financial management, it is important that organizations attempt to align their managers' interests with that of the shareholders. In Chapter 16, Berk and DeMarzo (2020) provide several examples of agency conflict or a conflict between the owners and the management of a firm. Examples of these are: (a) at times managers will take on less (greater) risk than they would if they were the owners of the firm and (b) due to the separation of ownership and control managers are able to entrench themselves within firms and have little risk of being replaced. Provide a few examples of mechanisms that organizations could use to align the interests of both the owners of the firm and its managers.arrow_forwardAgency theory suggests that one way to motivate managers to act in the best interests of the owners/shareholders is to link managerial compensation to firms' payoffs, such as net income or share returns. However, such a linkage imposes risk on the manager. Required: (1) Why is it important to control or reduce some of the risk thus imposed on managers? Explain. Discuss two methods by which risk imposed on the managers could be reduced.arrow_forward
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