Answer Happy

Answers the following questions regarding agency theory and
corporate governance.
1. In modern economies, it is common that shareholders are not
the managers of their
companies, resulting in a separation between control and ownership.
What are
the consequences and the problems for the company and its
shareholders resulting
from this separation?
2. Moral hazard generates agency costs reducing the value of
companies. Describe
some of the main ways by which managers use corporate money for
their own
benefit, reducing shareholders’ value. Include examples regarding
the effects of
moral hazard on investment selection.
3. From the shareholders’ perspective, describe the pros and
cons of using stock
options for manager compensation. Secondly, explain how stock
options may
lead managers to select projects with more risk than otherwise.
4. In addition to compensation structures, what other mechanisms
are used by
shareholders to reduce the manager-shareholder conflict of
interests?
Specifically, how do financial policies may be used to reduce this
conflict (for
example, via leverage)?
5. Explain the agent-principal conflict between shareholders
(agent) and lenders
(principal) by explaining why it arises, what the consequences for
corporate
financing are, and what may generally be done to mitigate this
conflict