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What is Agency Problems
When a principal hires an agent to carry out specific tasks, the hiring is termed a "principal-agent relationship," or simply an "agency relationship." When a conflict of interest between the needs of the principal and those of the agent arises, the conflict is called an "agency problem." In financial markets, agency problems occur between the stockholders (principal) and corporate managers (agents). While the stockholders call on the managers to take care of the company, the managers may look to their own needs first.

In finance, there are two primary agency relationships: * Managers and stockholders * Managers and creditors

PROBLEMS BTW STOCKHOLDERS versus MANAGER and STOCKHOLDERS versus CREDITORS...

1. Stockholders versus Managers * If the manager owns less than 100% of the firm's common stock, a potential agency problem between mangers and stockholders exists. * Managers may make decisions that conflict with the best interests of the shareholders. For example, managers may grow their firms to escape a takeover attempt to increase their own job security. However, a takeover may be in the shareholders' best interest

2. Stockholders versus Creditors * Creditors decide to loan money to a corporation based on the riskiness of the company, its capital structure and its potential capital structure. All of these factors will affect the company's potential cash flow, which is a creditors' main concern. * Stockholders, however, have control of such decisions through the managers. * Since stockholders will make decisions based on their best interests, a potential. * agency problem exists between the stockholders and creditors. For example, managers could borrow money to repurchase shares to lower the corporation's share base and increase shareholder return. Stockholders will benefit; however,

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