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FINC20023 - INTERNATIONAL FINANCIAL MANAGEMENT

Assessment Task 2 – (Individual) Test of Knowledge

Answer 1) Twin Agency Problem:

The management of the company or controlling shareholders can use their power and hold on decision making for their own benefit but at the expense of outside investors. The people in the management cadre are elected to act in the profit/wealth maximization of shareholders but they can act in a way so as to get profited themselves as they have access to varied internal information. For example, in many companies, the management shows inflated figures in balance sheets for profits but in actuality, there is no profit. The shareholders do not have information regarding the financial health of the company and they believe in figures posted by the management in balance sheets and account statements.  This case has happened in Enron. This is called the Twin agency problem.