Short Essays - Corporate Finance

Running Head : CORPORATE FINANCE

Corporate Finance

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Q1 . Principal-agent conflicts between senior managers and its middle managers

Principle-agent relationships exist between senior managers and middle level managers in large firms due to complicated structures and regulations put in place to control activities and transactions . Agency theory necessitates that because individuals are , after all self-interested they will have conflicts of interests over some issues any time they attempt to engage in organizations ' undertaking (Pierre Saussier , 2005 . The subsidiary management may pursue its

own goals at the expense of overall corporate goals by putting their own targets and ways of meeting those targets . This will lead to sub-optimization and conflict of interest with the head office where senior managers make decisions . Another form of conflicts arises when principals (senior managers ) delegates decisions making rights to an agent (middle manager to take some decision on their behalf , and the agent does not ordinarily have similar aim to that of the principal (Pierre Saussier , 2005 Since individuals are typically self-interested , the delegation of decision rights might brings forth a control problem linked to the temptation of individuals using that decision rights to be better off (Thaler Shefrin , 1981

Incentive compensations can be offered by the management to encourage proper decisions of the middle managers . The conflicts are so omnipresent and so familiar that they almost become inconspicuous (Salter , 2003 . The management can be involved in bonding and monitoring activities of all kinds between the senior management and the middle management...