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Agency Conflict

In: Business and Management

Submitted By gbad16
Words 1096
Pages 5
Agency Conflicts: An agency relationship arises whenever someone, called a principal, hires someone else called an agent, to perform some service, and the principal delegated decisions making authority to the agent.
In companies, the primary agency relationships are between: 1. Conflicts between stockholders and creditors 2. Conflicts between Inside Owner/Managers and outside owners 3. Conflicts between managers and shareholders
Conflicts between stockholders and creditors Conflict between shareholders and creditors is common for the company which use debt capital to form an optimum capital structure. As mentioned earlier, agency relation exist when one party works as an agent of the principal. In an organization management works as a agent of owner or share holders. When managers work for the company they can be influenced by the own interest so that they prefer their own interest rather than the interest of the company, on the other hand creditors interest is to provide credit and get the principal amount and interest timely. For ensuring their credit return creditor always concerned whether the company is doing business in the right manner or not. By monitoring the financial performance of the company creditors actually want to ensure their interest. So if there is any dispersion then creditors works to resolve the issue by taking necessary steps.
Creditors have a claim on part of the firm’s earnings stream as well as a claim on the firm’s assets in the event of bankruptcy. However, the stockholders have control through the firm’s managers of the decision that affect the profitability and risk of the firm. Creditors lend funds at an specific rate which is based on the several factors. These are: 1. On the riskiness of the firm’s existing assets, 2. On expectations concerning the riskiness of future asset additions, 3. On the firm’s...

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