Chapter 1, Problem 6PROB

Summary Introduction

To determine: What are some actions that stockholders can take to ensure that interests of management and stockholders coincide.

Shareholders authorize managers or executives to make critical decisions pertaining to the firm on their behalf. Stockholders expect these decisions to be consistent with their goal of wealth maximization but sometimes interests of managers conflict with goals of stockholders and that results in agency problem i.e. problem between stockholders (principals) and managers (agents).