Question

discuss how agency conflicts affect the goal of maximizing shareholder value

Answer 1

Agency problem arises due to conflict of interest between promoters of company or stockholders  and the management. The conflict arises due to interest of stockholder to maximize their own wealth whereas interest of manager will be to increase their own wealth.Agency problem reduces the value of share as managers dont want their company to be bid for a takeover due to job security issue. Manager would try to reduce share holder value to make the company less attractive to potential investors.

This principal and agent conflict can be minimised by using contracts and laws . This would make the agents legally committed to the stockholders. Performance linked pay would motivate agents to work in sync with the owners and reduce agency problem.