EECS 1019 Lecture Notes - Lecture 13: Agency Cost
15 Jun 2018
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EECS 1019 Lecture 13 Notes
Introduction
How the Internet Facilitates Management Control
• A centralized management style, as illustrated in the top section of Exhibit 1.1, can
reduce agency costs because it allows managers of the parent to control foreign
subsidiaries and thus reduces the power of subsidiary managers.
• Hoeer, the paret’s aagers ay ake poor deisios for the susidiary if they are
less ifored tha the susidiary’s aagers aout its settig ad fiaial
characteristics.
• Alternatively, an MNC can use a decentralized management style, as illustrated in the
bottom section of Exhibit 1.1.
• This style is more likely to result in higher agency costs because subsidiary managers
may make decisions that fail to maximize the value of the entire MNC.
• Yet this management style gives more control to those managers who are closer to the
susidiary’s operatios ad eiroet.
• To the extent that subsidiary managers recognize the goal of maximizing the value of
the overall MNC and are compensated in accordance with that goal, the decentralized
management style may be more effective.
• Given the clear trade-offs between centralized and decentralized management styles,
some MNCs attempt to achieve the advantages of both.
• That is, they allow subsidiary managers to make the key decisions about their respective
operatios hile the paret’s aageet oitors those deisios to esure they are
i the MNC’s est iterests.
• The Internet is making it easier for the parent to monitor the actions and performance
of its foreign subsidiaries.
• EXAMPLE
• Recall the example of Seattle Co., which has a subsidiary in Singapore.
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