Question

Discuss how agency conflicts affect the goal of maximizing shareholder value.

Answer 1

In large corporations, shareholders usually nominate directors also known as managers who run the company on behalf of all the owners of the business since a large number of shareholders cannot practically run the firm. The mangers are in a principal agent relationship with the company and the stockholders which may create agency conflicts. The managers can be motivated to fend for their self interests first rather than the shareholders which can have detrimental financial consequences and not actually serve the goal of the business i.e. maximization of shareholder value.