Lecture 1

Question 1

What are the two types of direct agency costs?

Answer 1

• Type 1: Capital expenditures benefiting the CEO but costing shareholders
• Type 2: Monitoring management actions
• These costs can lead to conflicts of interest between management and shareholders.

Question 2

How can agency problems be minimized or eliminated?

Answer 2

• By structuring executive compensation effectively.
• Proper payment structures can align the interests of executives with those of shareholders.
• Appropriate contractual incentives and contract design

Question 3

What issue arises in the majority-minority shareholder relationship?

Answer 3

Majority shareholders can elect directors who take actions benefiting them over minority shareholders. This can lead to conflicts and unfair treatment of minority shareholders.

Question 4

What is the shareholder-debtholder relationship?

Answer 4

An agency problem where the CEO favors one type of stakeholder over another, usually shareholders over debtholders. This can create conflicts in financial management and decision-making.

Question 5

What can be done to minimize the shareholder-debtholder agency problem?

Answer 5

Set up debt covenants, restraints on activities and money usage. These measures help ensure that both shareholders and debtholders’ interests are considered.

Question 6

What is the agency problem?

Answer 6

When the agent (manager) doesn’t work towards the protection and the best interests of the company’s stockholders (investors).