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Aug 27, 2020 · Agency problems are at the heart of modern corporate finance theories but for banks, agency problems may be more important than for non-financial firms since banks are more leveraged and have stronger explicit and implicit guarantees.
1. Introduction The banking literature has emphasized a number of agency problems. As in non-financial corporations, limited liability gives bank shareholders an incentive to expropriate wealth from bondholders by increasing risk.
- What Is An Agency Problem?
- Understanding Agency Problems
- Minimizing Risks Associated with The Agency Problem
- Real-World Example of An Agency Problem
An agency problem is a conflict of interest inherent in any relationship where one party is expected to act in another's best interests. In corporate finance, an agency problem usually refers to a conflict of interest between a company's management and the company's stockholders. The manager, acting as the agent for the shareholders, or principals,...
The agency problem does not exist without a relationship between a principal and an agent. In this situation, the agent performs a task on behalf of the principal. Agents are commonly engaged by principals due to different skill levels, different employment positions, or restrictions on time and access. For example, a principal will hire a plumber—...
Agency costs are a type of internal cost that a principal may incur as a result of the agency problem. They include the costs of any inefficiencies that may arise from employing an agent to take on a task, along with the costs associated with managing the principal-agent relationshipand resolving differing priorities. While it is not possible to el...
In 2001, energy giant Enron filed for bankruptcy.Accounting reports had been fabricated to make the company appear to have more money than what was actually earned. The company's executives used fraudulent accounting methods to hide debt in Enron's subsidiaries and overstate revenue. These falsifications allowed the company’s stock price to increas...
Mar 25, 2021 · Using a simultaneous equations approach, our main findings indicate that the proportion of independent directors, the board size, and Chief Executive Officer (CEO) power affected bank risk-taking negatively during the recent financial crisis.
- Catarina Fernandes, Jorge Farinha, Francisco Vitorino Martins, Cesario Mateus
- 2021
Remuneration and Agency Costs in the Financial Sector It is important to predicate our discussion of remuneration policy in the financial sector by highlighting relevant differences between many financial firms and non-financial firms.
This paper examines how firm characteristics, legal rules, and financial development affect. corporate finance decisions. In contrast to the existing literature, I use data on unlisted companies to show that institutions play an important role in determining the extent of agency problems.
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Because these differences exist, and because all parties have a desire to maximize their own wealth, agency problems can often arise, having a negative impact on company profits, stock price, and the goodwill of the shareholder base. There are three primary types of agency problems, discussed below.
