What is advantage of stock in the firm in terms of mitigating agency problems?

Answer 1

Agency problem includes the basic conflict between management and stakeholders with respect to former s risk taking capability in order to generate return for the later , in the same time covering own position safe. Its a dichotomy where management s personal and professional interest collides.

Stock in the firm or making management come to join party with the stakeholders will put a moral pressure as well as encourage them to take care of there own assets which is mutual to the stakeholder too.

Its by very nature of individual that they can risk for personal interest in a rational way than for the professional front..

Example : take the example of credit rating agency hired by a company. Now if credit rating agency go strictly and evaluate company a low rating then it may loose future business with company and it it does not then its colliding with rating agency's professional front.

Usually incentives are best mode to overcome such problems and hence stock in firm bind both the parties together.