Fundamentals of Corporate Finance, Student Value Edition Plus MyLab Finance with Pearson eText -- Access Card Package (4th Edition)
Fundamentals of Corporate Finance, Student Value Edition Plus MyLab Finance with Pearson eText -- Access Card Package (4th Edition)
4th Edition
ISBN: 9780134641928
Author: Jonathan Berk, Peter DeMarzo, Jarrad Harford
Publisher: PEARSON
Question
Chapter 1, Problem 13P
Summary Introduction

Corporation:

A corporation is a separate legal entity which is separate from its owners. It is an artificial body and continues to exist even after the death of its owners where in such case the ownership is transferred. The owners are separate from the legal body and hence they are not liable for any obligation of the corporation individually. Similarly, the corporation is also not liable for any of the personal obligations of its owners.

Agency Problem

Agency problem happens in a corporation where the ownership of the firm and the control are in two different hands. It is a situation in which there is a conflict of interest between the manager and shareholders of a company. The managers are hired to make decisions on behalf of the shareholders but the managers take decisions that favor their interest instead of the shareholders. This is known as the agency problem that often happens in corporations.

To Identify:

The nature of the agency conflict in the given question and the way it is related to ethical considerations.

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