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Unformatted text preview: club memberships, limousines, and posh offices provided at company expense, of course. Such concerns cause managers to pursue objectives other than shareholder wealth maximization. Financial economists recognize the agency costs caused by conflicts between the interests of shareholders and managers. This conflict between the goals of a firms owners and managers gives rise to managerial agency problems, which Jensen and Meckling (1976) define as costs arising from the likelihood that managers may place personal goals ahead of corporate goals. These costs can be minimized by, for example, tying managements compensation to stock price so they have an incentive to work to maximize stock price. Such contracts can be effective if structured properly, although they have been criticized as providing excessive gains to managers when the entire market was rising. If members of an LLC manage the company, it should not lead to an agency problem...
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- Spring '11