EECS 1019 Lecture Notes - Lecture 9: Agency Cost
15 Jun 2018
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EECS 1019 Lecture 9 Notes
Introduction
Agency Problems
• The potential benefits of such new business depend on expected consumer interest in
the products to be sold (marketing function) and expected cost of the resources needed
to pursue the new business (management function).
• Financial managers rely on financial data provided by the accounting and information
systems functions.
• Maagers of a MNC a ake deisios that oflit ith the fir’s goal of
maximizing shareholder wealth.
• For example, a decision to establish a subsidiary in one location versus another may be
ased o the loatio’s appeal to a partiular aager rather tha o its potetial
benefits to shareholders.
• A deisio to epad a susidiar a e otiated a aager’s desire to reeie
more compensation rather than to enhance the value of the MNC.
• This oflit of goals etee a fir’s aagers ad shareholders is ofte referred to as
the agency problem.
• The costs of ensuring that managers maximize shareholder wealth (referred to as
agency costs) are normally larger for MNCs than for purely domestic firms for several
reasons.
• First, MNCs with subsidiaries scattered around the world may experience larger agency
problems because monitoring the managers of distant subsidiaries in foreign countries
is more difficult.
• Second, foreign subsidiary managers who are raised in different cultures may not follow
uniform goals.
• Third, the sheer size of the larger MNCs can also create significant agency problems.
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