Is it true that..........?

Question

is it true that agency costs between managers and shareholders, reduce shareholder value?

Answer 1

Yes. Agency costs consist of two main sources:

1. The costs inherently associated with using an agent (e.g. the risk that agents will use organizational resource for their own benefit) and

2. The costs of techniques used to mitigate the problems associated with using an agent (e.g the costs of producing financial statements or the use of stock options to align executive interests to shareholder interests).

The information asymmetry that exists between shareholders and the Chief Executive Officer(CEO)  is generally considered to be a classic example of a principal-agent problem. The agent (the CEO) is working on behalf of the principal (the shareholders), who does not observe the actions of the agent. This information asymmetry causes the agency problems of moral hazard and adverse selection.

Agency costs mainly arise due to divergence of control, separation of ownership and control and the different objectives (rather than shareholder maximization)the managers consider. Managers usually want to satisfy their own objectives such as job-guarantee, less work by investing in pt projects(projects that are not valuable positively for the company) , by selecting projects with low payback period etc.