© 2017 BY JINVEST Limited.

jinvestrj@gmail.com   |   6/F, Central 88, 88-98 Des Voeux Road Central, Hong Kong

  • Instagram Social Icon
  • Pinterest Social Icon
  • YouTube Social  Icon
  • Facebook Social Icon
Please reload

Recent Posts

Financial Literacy | Food for Thought | Why We should Learn Finance?

January 24, 2017

1/2
Please reload

Featured Posts

Financial Literacy | Principal-Agent Problem (Part2 | Chapter5)

June 14, 2017

 

 

PART2 | KEY PRINCIPLES OF FINANCE

 

CHAPTER5 | PRINCIPAL-AGENT PROBLEM

 

 

 

Nowadays, most of large corporations are run by professional managers while the company is legally owned by shareholders. These professional managers are often called C-Suites.

 

Unfortunately, the professional managers’ objectives are not always in line with that of shareholders’.

 

While shareholders expect the management to “maximize the shareholders’ value”, the management may not behave accordingly. For example, some managers would solely focus on sales revenues or market shares to build their resume and prepare for their future career. Some managers would focus on short-term achievements so that they can be re-elected.

 

In finance, these conflicts of interests are called the “Principal-Agent Problem” or “Management Versus Owner Objectives”. A lot of studies have been conducted on how to align the objectives of both the shareholders and the management, but no concrete conclusions have been arrived. Stock options for the managers or bonuses based on the performance of stock price are some of examples of the efforts that have been commonly implemented to align the interests of the two different parties.

 

Although this Principal-Agent Problem is more readily discussed in corporate finance area, it is still applicable to our everyday lives. One of the applicable examples is that the bankers’ or brokers’ incentives are not always in line with our own, so keep that in mind when you face them.  

Click here to watch this clip on YouTube.

Share on Facebook
Share on Twitter
Please reload

Follow Us
Please reload

Archive
  • Facebook Basic Square