Agency Relationship Essay

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An agency relationship is defined as a person (the principal) appoints another person (the agent) to act on its behalf, which is also known as the principal-agent relationship. Once there is a conflict of interest between the needs of the principal and the needs of the agent, we call it as an agency problem. The most well known agency problem in modern corporate firms is the conflicts between shareholders and managers. However, the agency problem also exists between shareholders and debt holders. This paper is intended to evaluate the agency problems between shareholders and managers, as well as shareholders and debt holders. The following paper is specified into four sections to evaluate the agency problem. Section I and II mainly focus on …show more content…

However, if the project is negative, both the shareholders and debt holders have to share the cost of failure. In another word, shareholders are trying to maximize their personal wealth at the expense of debt holders. Therefore, debt holders are more likely to choose the project which can increase the probability of getting their investment back. The second conflict between shareholders and debt holders is the amount of dividend to pay out. For shareholders, a high dividend is desired as the shareholders’ wealth can be directly maximized with this high dividend. However, debt holders do not like the firm paying a high dividend to shareholders. Because high dividend payment may lead to the reduction in the company’s cash flow, which may finally destroy debt holders’ wealth. Section III: Control of agency conflicts. The agency conflicts not only indicate the diverse objectives in running the company between the principal and the agent but also may

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