What are agency conflicts? What groups can have agency conflicts?

What are agency conflicts? What groups can have agency conflicts?

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June 4, 2021
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What are agency conflicts? What groups can have agency conflicts?

Answer and ExplanationSolution by a verified expert

Explanation

Agency conflicts are the conflicts of interest arising in agency relationships, that is, between principal and the agent where the former delegates some authority to the latter to work on their behalf.
 
Groups that can have agency conflicts are:

Stockholders and creditors: Agency conflicts may occur between stockholders and creditors. Return is the reward for risk which means high the risk, higher is return from the project. Stockholders always prefer to maximise their returns; thus, are highly risk tolerant. However, the creditors often oppose the risk to ensure their regular interest receipts and safeguard the principal amount.
Inside owners and outside owners: Agency conflicts occur when outside investors are invited to participate in company’s ownership through investment in equity which in turn dilutes the stake of inside owners. Outside owners participate in the decision making process, general meetings and enjoy voting rights that give rise to agency conflicts. The  conflicts that arise between inside owners and outside owners are that the outside owners also have to bear the cost of perquisites enjoyed by inside owners.
Managers and shareholders: Agency conflicts between managers and shareholders may arise due to the differences in their interest and objectives. Managers may look for their personal benefits in terms of money, self esteem, reputation, promotions and so on and ignore productive activities for the firm whereas shareholders want to maximise their return through increase in firm’s profit.

Verified Answer

Agency conflicts are the conflicts occured in agency relations on delegating authority and responsibility by principal to the agent.
 
Groups that can have agency conflicts are:

Stockholders and creditors,
Inside owners and outside owners of a company and,
Managers and shareholders.

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