Two parties double entry principle both acting in

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two parties’ double entry principle, both acting in their own best interest, but with different expectations. When agency problems occur, it mostly leads to agency costs. This is cost or expenses incurred to sustain an effective agency relationship, e.g., offering management performance bonuses to encourage managers to act in the shareholders' interests. The owners of the business need to initiate an adequate financial management competency to ensure that there is less in an offer for such kind of conflict.
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Another issue that is developed by the agency theory is moral hazard problem. The moral hazard problem is where the managers want to engage in business contracts or risks for their interest neglecting the shareholder’s or owner’s interests. Financially, the moral hazard problem sets surface when the agent decides how much chance will help the business take, while shareholders bear the cost if things get bad. Acknowledging the tradeoff between risk and reward, managers will seek to take more risks, and, thus, rewarding themselves high wages, without thinking morally about the risk they are making shareholders endure. This theory best explains the liquidity management of the organization where the managers and not the owners make financial decisions about the firm.
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  • Summer '11
  • manager
  • Principal-agent problem, agency problem

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