agent

Examples of agent in the following topics:

• Defining Agency Conflicts

  • Agency conflicts can occur when the incentives of the agent do not align with those of the principal.
  • The principal–agent problem or agency dilemma, developed in economic theory, concerns the difficulties in motivating one party (the "agent"), to act on behalf of another (the "principal").
  • The two parties have different interests and asymmetric information (the agent having more information), such that the principal cannot directly ensure that the agents are always acting in its (the principals') best interests, particularly when activities that are useful to the principal are costly to the agent, and where elements of what the agent does are costly for the principal to observe.
  • Examples of agency costs include that borne by shareholders (the principal), when corporate management (the agent) buys other companies to expand its power instead of maximizing the value of the corporation's worth; or by the constituents of a politician's district (the principal) when the politician (the agent) passes legislation helpful to large contributors to their campaign rather than helpful to voters.
  • Principal-agent problems - which arise when managers act on the behalf of a firm and its investors - include potential conflicts of interest.

• Agency

  • A private firm might also hire an investment bank as a placement agent.
  • They hire a placement agent to act as an intermediary between them and investors.
  • Placement agents are most often compensated through fee arrangements based on the amount of money raised and supported by the fund or company they are representing.

• Maximizing Shareholder and Market Value

  • In large firms where there is a separation of ownership and management and no controlling shareholder, the principal–agent issue arises between upper-management (the "agent") and shareholders (the "principals").
  • Thus, one interpretation of proper financial management is that the agents are oriented toward the benefit of the principals - shareholders - in increasing their wealth by paying dividends and/or causing the stock price or market value to increase.

• Conflicts of Interest Between Shareholders and Bondholders

  • The agency view of the corporation posits that the decision rights (control) of the corporation are entrusted to the manager (the agent) to act in the principals' interests.
  • The deviation from the principals' interests by the agent is called 'agency costs', which are often described as existing between managers and shareholders; but conflicts of interest can also exist between shareholders and bondholders.

• Comparing the Fields of Finance, Economics, and Accounting

  • It focuses on how economic agents (people, businesses, and government) interact and make decisions.
  • It tries to figure out how one variable affects economic agents or the economy as a whole.

• Managers, Shareholders, and Bondholders

  • The deviation from the principal's interest by the agent is called 'agency costs. ' Agency costs mainly arise due to contracting costs and the divergence of control, separation of ownership and control and the different objectives of the managers and other stakeholders.
  • These three parties have different interests and asymmetric information, such that the principals cannot directly ensure that the agents are always acting in its (the principals') best interests.

• Corporate Fraud

  • Some corporations suffer from the principal-agent problem, when two related parties have different incentives, creating conflicts and odds with each other.For example, the corporate structure separates the managers from the owners (i.e. stockholders).Stockholders select managers, who maximize profits, maximize the return to the shareholders and/or increase shareholder value.However, managers may not act in the best interest to the owners.They want high salaries, generous benefits, luxurious offices, and access to private planes and Limousines, reducing the return to the stockholders.
  • The U.S. investment banks, for example, were partnerships before the 1990s, and the managers handled money carefully.They were both the principal and agent.Then the managers converted the investment banks to corporations during the 1990s, and the managers gambled and took high risks while the shareholders owned the corporations.Investment banks became involved in the mortgage market in the early 2000s and were caught in the mania of the U.S. housing bubble.When the bubble deflated, the shareholders lost their stock value during the 2008 Financial Crisis.Finally, for one perverse example, GM cancelled its stock, and the shareholders lost everything during 2008.Remember, the corporate managers represent the shareholders and run the corporation on their behalf.
  • A family who dominates a corporation could reduce the principal-agent problem.For example, the Walton family is the majority shareholders who actively manage the Wal-Mart Corporation.Microsoft was similar, when Bill Gates was both the CEO and majority shareholder.Consequently, they become both the agent and principal, and they have one united interest - to earn profits.Thus, these companies earned high returns, and managers have better vision and oversight over their corporations.

• Chapter Questions

• Role of Financial Markets in Capital Allocation

  • More complex transactions than a simple bank deposit require markets where lenders and their agents can meet borrowers and their agents, and where existing borrowing or lending commitments can be sold on to other parties.

• Chapter Questions

  • Does the principal-agent problem exist if a university pays a commission to an enrollment counselor who enrolls students in the university?