Question

Agency conflicts between managers and shareholders An agency relationship can degenerate into an agency conflict when an agent acts in a manner that is not in the best interest of his or her principal. In business, these conflicts most frequently involve the enrichment of the firm's executives or managers (in the form of money and perquisites or power and prestige) at the expense of the shareholders. This usurping of shareholder wealth is most likely to occur when shareholders do not have sufficient information about the decisions and actions being made by the firm's management. Consider the following scenario and determine whether an agency conflict exists: Daniel owns Daniel's Tantalizing Tees, a T-shirt shop in a small college town in Kansas. With a staff of three part-time employees, Daniel operates the business in accordance with his personal goals, dreams, and capabilities.
Does Daniel have an agency conflict to deal with?
A. No; by having part-time, as opposed to full-time, employees, Daniel is prevented from experiencing an agency conflict.
B. Yes; as both the owner and operator of Daniel's Tantalizing Tees, Daniel has created the necessary agency relationship through which an agency conflict can exist.
C. No; as both the owner and operator of Daniel's Tantalizing Tees, Daniel has not created the necessary agency relationship through which an agency conflict can exist.
D. Yes; there is always an inherent conflict of interest between owners and operators (managers). Consider the following scenario and determine whether an agency conflict exists: Five years ago, Li created a plant-care business that grew, stocked, and maintained fresh plants in office buildings throughout Denver. Over time, The Green Zone Inc. (TGZ) has grown from a proprietorship into a corporation, now reaching far beyond Denver. To finance and support this growth, TGZ issued shares that were sold to TGZ employees, Li's family members, and selected outsiders. Li is TGZ's chairman of the board of directors and CEO, but he is no longer the largest shareholder. At the latest annual meeting, two mutually exclusive proposals were placed on the ballot for discussion and vote. The first was put forth by Li and TGZ's management team, and the second was proposed by a small group of other shareholders. Both groups are adamantly opposed to the other group's proposal, even though both proposals would likely have the same effect on TGZ's value and riskiness.
Does an agency conflict exist between TGZ's management and the small group of opposing shareholders?
A. Yes; an agency relationship exists, and an agency relationship always gives rise to agency conflicts, regardless of the actual behavior of the participants.
B. Yes; any conflict or disagreement between the firm's managers and its shareholders constitutes an agency conflict.
C. No; although an agency relationship exists between TGZ's management-including Li as TGZ's chairman and CEO and the firm's shareholders-there is no agency conflict, because no expropriation or wasting of the shareholders' wealth has occurred.
D. No; Li was the original owner of TGZ, so he would always be sensitive to the concerns of the firm's current owners (shareholders) and would not engage in an agency conflict. For the past 40 years, companies have attempted to attract, retain, and encourage managers by developing attractive compensation packages. These compensation packages have also been intended to reduce potential agency conflicts between these managers and the firm's shareholders. In the best interest of shareholders, compensation packages should be structured in a way such that managers have an incentive to maximize the____value of the company's common stock price. Great Fortunes Baking Company's stockholders are mostly individual investors, and there is relatively little institutional ownership. If several pension and mutual funds were to take large positions in Great Fortunes Baking Company's stock, direct shareholder intervention would be likely to motivate the firm's management. Katz Investment Group's stock price is currently trading at $20 per share. The consensus among market analysts is that the stock should trade for $27.5 per share, given the amount, timing, and riskiness of the company's dividends. Is Katz Investment Group more or less likely to receive a hostile takeover bid?
1. Less likely
2. More likely

Answer 1

Answer:

1. C. No; as both the owner and operator of Daniel's Tantalizing Tees, Daniel has not created the necessary agency relationship through which an agency conflict can exist.

For an agency problem to exist, the owners and the managers must be two different sets of people. If they are the same person, then practically speaking, they cannot usurp their own wealth.

2. C. No; although an agency relationship exists between TGZ's management-including Li as TGZ's chairman and CEO and the firm's shareholders-there is no agency conflict, because no expropriation or wasting of the shareholders' wealth has occurred.

Indeed there is an Agency relationship in effect because some shareholders are not in management. However, it cannot be said that there is a agency conflict because there is no evidence shown that shareholder wealth is being expropriated.

3.  Intrinsic

The  Intrinsic value of a stock is the value that an investor believes the stock is worth. A Manager should therefore get incentives that will inspire them to take investor perception of stock high. When this happens it increases shareholder wealth primarily through capital gain.

4 ... direct shareholder intervention would be more likely to motivate the firm's management.

Institutional Investors such as Pension and Mutual funds usually have more say in a company as they represent several shareholders and have expertise in  the field. Should they get involved, their direct intervention would motivate the firm's management.

5. More likely

If investors believe that the stock should be trading for higher than it actually is, this is incentive to try to lay their hands on the stock to take advantage of this undervaluation. They would be able to offer the current shareholders more money than what it is currently worth which will most likely get them the shares they want. This is classified as a Hostile takeover.