Question

Explain why an increase in compensations would increase agency problems?

Explain why an increase in compensations would increase agency problems?

Homework Answers

Answer #1
  • Agency problems occur when the incentives and compensation present themselves to an agent to not act in the full interest of its principal.
  • In a corporation, agency problem is the conflict of interest between shareholders and management.
  • Management are agents of shareholders and they should act according to the shareholder's interest.
  • If compensations are increased, earnings will decrease and in result dividends, hence it will not be in the interest of the shareholders.
  • Therefore, by increasing compensations, management is not acting as an agent in full interest of its shareholders and hence increasing the agency problems.
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Which form of business structure(s) can potentially face agency problems and which faces the greatest agency...
Which form of business structure(s) can potentially face agency problems and which faces the greatest agency problems and explain why?   sole proprietorship general partnership limited partnership corporation
There are two major types of agency problems in corporate finance: Type 1 agency problem: Free...
There are two major types of agency problems in corporate finance: Type 1 agency problem: Free Cash Flow Diversion/Squandering. Conflict of interest between managers and shareholders. Type 2 agency problem: Debt Overhang/Under-investment. Conflict of interest between bondholders and shareholders. 1. If a company increases its leverage, then type 1 agency problems will: a)Increase b)Decrease c)Not change 2. If a company decreases its leverage, then type 2 agency problems will: a)Increase b)Decrease c)Not change 3. Due to a decrease in dividend...
What are principal-agent agency problems and principal-principal agency problems?
What are principal-agent agency problems and principal-principal agency problems?
What is an agency problem? What mechanisms could minimize these problems? Please explain
What is an agency problem? What mechanisms could minimize these problems? Please explain
1) Describe why publicly-held firms have an "agency problem." Agency problems exists when the interest of...
1) Describe why publicly-held firms have an "agency problem." Agency problems exists when the interest of the individuals that act as agents to manage the company, that may not align with the interest of the firms stockholders. Publicly held firms typically have agency problems due to conflicts on interest with people on the board including the companies stockholders and management..... Not quite sure what to add here... 2) Identify the main mechanism used to deal with the ageny problem. 3)...
Unique manifestations of agency problems in global market and how to mitigate the agency issue.
Unique manifestations of agency problems in global market and how to mitigate the agency issue.
The short Question:Do you think ‘agency’ problems are likely to be more or less severe in...
The short Question:Do you think ‘agency’ problems are likely to be more or less severe in Germany and Japan than in the United States? Why?
What government agency is in charge of managing conflict resolution, coordination problems and collective action problems?
What government agency is in charge of managing conflict resolution, coordination problems and collective action problems?
Briefly explain how the use of debt and leverage can reduce agency costs and increase firm...
Briefly explain how the use of debt and leverage can reduce agency costs and increase firm value (3-4 sentences preferred).
Explain why a decrease in income taxes would not necessarily increase the riskiness of investments people...
Explain why a decrease in income taxes would not necessarily increase the riskiness of investments people are willing to undertake.
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT