Question

4 of 10 (0 complete) roblem 1.LO4.20 (static) Nhich of the following is not an example of an agency problem? (Select the best choice below.) O A. Your general practioner recommends a specialist with a tremor to perform your surgery ° C. A book keeper hired from a temp agency mis-keys several large transactions. O B. The CEO has a museum constructed to house the oll company's collection of french impressionist paintings O D. A stockbroker picks a mutual fund with a high-expense ratio for an investor E. The General Manager trades an outfielder batting .450 in exchange for his wife's nephew.

Answer 1

The agency problem is a conflict of interest inherent in any relationship where one party is expected to act in another's best interests. In corporate finance, the agency problem usually refers to a conflict of interest between a company's management and the company's stockholders. The manager, acting as the agent for the shareholders, or principals, is supposed to make decisions that will maximize shareholder wealth even though it is in the manager’s best interest to maximize his own wealth.

The agency problem does not exist without a relationship between a principal and an agent. In this situation, the agent performs a task on behalf of the principal. Agents are commonly engaged by principals due to different skill levels, different employment positions or restrictions on time and access. For example, a principal will hire a plumber — the agent — to fix plumbing issues. Although the plumber‘s best interest is to collect as much income as he can, he is given the responsibility to perform in whatever situation results in the most benefit to the principal.

The agency problem arises due to an issue with incentives and the presence of discretion in task completion. An agent may be motivated to act in a manner that is not favorable for the principal if the agent is presented with an incentive to act in this way. For example, in the plumbing example, the plumber may make three times as much money by recommending a service the agent does not need. An incentive (three times the pay) is present, and this causes the agency problem to arise.

Agency problems are common in fiduciary relationships, such as between trustees and beneficiaries; board members and shareholders; and lawyers and clients. These relationships can be stringent in a legal sense, as is the case in the relationship between lawyers and their clients due to the U.S. Supreme Court's assertion that an attorney must act in complete fairness, loyalty and fidelity to their clients.

In this case option a is not under agency problem as there is only recommendation by the general practioner. The action is not yet taken and its upto the patient to go ahead with surgery or look for another sepcialist.