Question

In recent years, large financial institutions such as mutual funds and pension funds have become the dominant owners of stock in the United States, and these institutions are becoming more active in corporate affairs. What are the implications of this trend for agency problems and corporate control?

Answer 1

Answer:

Agency problems arise when managers (agents) of a company seek their own best interests instead of that of the stockholders (principal).

With Pension funds owning a significant amount of stock in companies now, they will potentially reduce agency problems because they have experience in the are of limiting agency problems and by owning a lot of shares they will have the power to influence the company to make policies that will limit these problems as well.

This is where Corporate control comes in. With such large control, Pension funds can dictate some processes in the company and they will most likely do so in a manner that will ensure that the shareholders (like themselves) will benefit as should be the case.