Agency problem What is agency problem? • The primary agency relationships in business are those between stockholders and managers • Agency problem occurs where there is conflict of interest between stockholders and managers – The shareholders demand and receive high cash returns on their investment (wish to maximize share’s value) – Managers desire to maximize profit or their personal utility When there is agency problem? Self-interested behavior • Agents have the ability to operate in their own self-interest rather than in the best interests of the firm because of asymmetric information • Outside investors recognize that the firm will make decisions contrary to their best interests Accordingly, investors will discount the prices they are willing to pay for the firm's securities Interest conflicts Selling and buying shares for managers’ own interest, maximize their personal utility, have personal goals that compete with the owner's goal of maximization of shareholder wealth Interest conflicts • Cases: (moi case lam slide) + KinhDo gave loans to managers without passed resolution of shareholders + Domesco net profit reduced by 2% but managers asked for bonus of 15% net profit + PetroVN transportation: Sister of Board Director member sold stocks without publishing info Interest conflicts Reducing production cost to maximize profit, hurting sharevalues KinhDo’s case Case: + KinhDo cakes was found to be spoilt => probably due to low standard production (aiming to increase profit but finally harm firm’s value Published 27 April 2009  stock price reduced the following days KinhDo’s case Interest conflicts Action the interest of major shareholders, regardless of minority shareholders PLPC’s case Case: + PLPC: financial management and large transactions with EVN might raise some minority shareholders’ concerns, while it is still bearing a huge loan in JPY, hurting shareholder value Đính kèm slide đã làm về case này EVN and EVNFC are major shareholders of PLPC, take control of most management activities of PLPC => financial management and large transactions with EVN might raise some minority shareholders’ concerns Đính kèm slide đã làm về case này • PPC spends large amount of cash in the other subsidiaries of EVN or gives loans to EVN at low interest - Invested 100 billion in EVNFC bonds in 2010 - Gave loan of 350 billion to EVN - Invested 70 billion in International EVN • While bearing a huge loan in JPY, hurting shareholder value (Company suffered from a loss of VND1,000 billion due to exchange rate) Statement of Cash Flow (cont.) => Financing activities generated deeper and deeper loss, affecting net income Revenue & Profit growth ...What is agency problem? • The primary agency relationships in business are those between stockholders and managers • Agency problem occurs where there is conflict... maximize share’s value) – Managers desire to maximize profit or their personal utility When there is agency problem? Self-interested behavior • Agents have the ability to operate in their own self-interest