1. Agency conflicts and costs The nature and effects of agency conflicts Agency conflicts are a special example of a conflict of interest; specifically, they are created by the relationship , and result from inconsistencies or disputes between the interests and motivations of the different parties. The magnitude of these conflicts may be made larger or smaller by the environment in which they occur and the availability of techniques or events to prevent, reduce, or rectify them. For example, in businesses managed by professional managers, managers frequently have less financial and emotional commitment to the business than the firm\'s owners (the firm\'s common shareholders). The of ownership and management and the managers of decision making by the owners to the professional create an environment in which these conflicts can take root. Left unaddressed, these conflicts can produce significant real and opportunity costs that the firm\'s shareholders and other stakeholders must bear. Examples of management behaviors that are not in the best interests of the firm\'s shareholders include shirking, an excessive consumption of perquisites, an excessive concern with job security reduced or excessive risk taking, and/or undertaking activities that are principally intended to expand or enhance a manager\'s ego, prestige, or power To prevent, reduce, or correct these conflicts between their managers and themselves, shareholders often have to incur additional real costs called costs. In general, there are four categories of real or opportunity costs incurred by shareholders designed to prevent, mitigate, or correct management shareholder agency conflicts. They are 1. Expenditures to minimize management\'s desire to act contrary to the best interests of shareholders 2. Expenditures to monitor management\'s activities 3. Expenditures to provide a bond against management dishonesty 4. The opportunity cost of lost profits Consider the following situation and identify both the category of the expenditure and the best device that might be used to prevent, reduce, or correct the agency conflict: Solution As per rules I will answer the first 4 subparts of the question 1:management and shareholders (There is see an agency conflict between the managers and shareholders since they have different interests) 2:Separation (Agency conflict arises since the owners are different from managers) 3:delegation (The shareholders give managers the right to make the decisions) 4:Agency costs (These are internal costs that arises from agency relationship and due to conflict of interests).

1. 1. Agency conflicts and costs The nature and effects of agency conflicts Agency conflicts are a
special example of a conflict of interest; specifically, they are created by the relationship , and
result from inconsistencies or disputes between the interests and motivations of the different
parties. The magnitude of these conflicts may be made larger or smaller by the environment in
which they occur and the availability of techniques or events to prevent, reduce, or rectify them.
For example, in businesses managed by professional managers, managers frequently have less
financial and emotional commitment to the business than the firm's owners (the firm's common
shareholders). The of ownership and management and the managers of decision making by the
owners to the professional create an environment in which these conflicts can take root. Left
unaddressed, these conflicts can produce significant real and opportunity costs that the firm's
shareholders and other stakeholders must bear. Examples of management behaviors that are not
in the best interests of the firm's shareholders include shirking, an excessive consumption of
perquisites, an excessive concern with job security reduced or excessive risk taking, and/or
undertaking activities that are principally intended to expand or enhance a manager's ego,
prestige, or power To prevent, reduce, or correct these conflicts between their managers and
themselves, shareholders often have to incur additional real costs called costs. In general, there
are four categories of real or opportunity costs incurred by shareholders designed to prevent,
mitigate, or correct management shareholder agency conflicts. They are 1. Expenditures to
minimize management's desire to act contrary to the best interests of shareholders 2.
Expenditures to monitor management's activities 3. Expenditures to provide a bond against
management dishonesty 4. The opportunity cost of lost profits Consider the following situation
and identify both the category of the expenditure and the best device that might be used to
prevent, reduce, or correct the agency conflict:
Solution
As per rules I will answer the first 4 subparts of the question
1:management and shareholders
(There is see an agency conflict between the managers and shareholders since they have different
interests)
2:Separation
(Agency conflict arises since the owners are different from managers)
3:delegation
(The shareholders give managers the right to make the decisions)
4:Agency costs
(These are internal costs that arises from agency relationship and due to conflict of interests)