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    This document discusses agency problems that can arise between shareholders and managers in a company. It describes how managers may be tempted to pursue their own interests rather than maximizing shareholder value, such as by taking excessive perks, empire building, or overinvestment. The document also notes that agency problems can occur further down in a company as operating managers make many decentralized investment decisions everyday that may not be visible to top management. As an example, it suggests some managers promoted risky subprime mortgages more to benefit themselves through bonuses than shareholders.

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    This document discusses agency problems that can arise between shareholders and managers in a company. It describes how managers may be tempted to pursue their own interests rather than maximizing shareholder value, such as by taking excessive perks, empire building, or overinvestment. The document also notes that agency problems can occur further down in a company as operating managers make many decentralized investment decisions everyday that may not be visible to top management. As an example, it suggests some managers promoted risky subprime mortgages more to benefit themselves through bonuses than shareholders.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
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    10 views5 pages

    Agency Problem Invesntment

    Uploaded by

    sketsamata
    This document discusses agency problems that can arise between shareholders and managers in a company. It describes how managers may be tempted to pursue their own interests rather than maximizing shareholder value, such as by taking excessive perks, empire building, or overinvestment. The document also notes that agency problems can occur further down in a company as operating managers make many decentralized investment decisions everyday that may not be visible to top management. As an example, it suggests some managers promoted risky subprime mortgages more to benefit themselves through bonuses than shareholders.

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    © All Rights Reserved
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    of 5

    AGENCY PROBLEM AND INVESTMENT

    AGENCY

    AGAENCY
    Shareholders are the ultimate
    principals; top managers are the
    stockholders’ agents. But
    middleman- agers and employees
    are, in turn, agents of top
    management
    The problem is to get everyone
    working together to maximize
    value

    This chapter describes how companies


    grapple
    . with that problem.
    We first describe the temptations that
    can divert managers from maximizing
    shareholder value and then discuss
    how those temptations are blocked or
    at least diluted
    7/14/20XX Pitch deck title 2
    WHAT AGENCY PROBLEMS SHOULD YOU WATCH OUT
    FOR?

    AGENCY
    REDUCED EFFORT ENTRENCHING INVESTMENT
    Finding and implementing positive-NPV projects Projects designed to require or reward the skills
    can be a high-effort, high-pressure activity. of existing managers are called entrenching
    Managers may be drawn to slack off. investments.

    PERKS OVERINVESTMENT
    Managers are tempted to spend wastefully on Investing beyond the point where NPV falls to
    upscale office accommodations, meetings zero. The temptation to overinvest is highest
    scheduled at luxury resorts, private jets, and so when the firm has plenty of cash but limited
    on. investment opportunities. Michael Jensen called
    this the free-cash-flow problem

    EMPIRE BUILDING INSUFFICIENT DISINVESTMENT.


    Other things equal, managers prefer to run large There is also a reluctance to disinvest, especially
    businesses rather than small ones when jobs are at stake. Sometimes value is added
    by selling off a factory or product line or closing
    down a loss-making business

    7/14/20XX Pitch deck title


    Agency Problems
    Don’t Stop at the Top
    THE BYPASS WON’T WORK
    Top management must rely on analysis done at lower levels

    INVESTMENT DECISIONS THAT TOP


    MANAGERS DO NOT SEE
    He or she can’t afford the time or the technical knowledge to
    investigate every alternative that was considered but rejected by
    the project’s sponsors.

    MANY CAPITAL INVESTMENTS DON’T


    APPEAR IN THE CAPITAL BUDGET
    These include research and development, worker training, and
    marketing outlays designed to expand a market or lock in satisfied
    customers.
    SMALL DECISIONS ADD UP
    Operating managers make investment decisions every day. They
    may carry extra inventories of raw materials so they won’t have to
    worry about being caught short
    7/14/20XX Pitch deck title 4
    Although there’s plenty of blame to pass around
    Example: Agency Costs for the subprime crisis, some of it must go to
    the managers who promoted and sold the
    and Subprime Mortgages subprime mortgages.
    Were they acting in shareholders’ interests or
    their own interests? We doubt that their
    shareholders would have endorsed the
    managers’ tactics if the shareholders could have
    seen what was really going on.
    We think that the managers would have been
    much more cautious if they had not had the
    chance for another fat bonus before their
    game ended. If so,
    the financial crisis was
    partly an agency problem,
    not value maximization run amok.
    7/14/20XX Pitch deck title 5

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