Last updated: 09:18 / Monday, 28 April 2014
White Paper, CFA Institute

Misaligned Incentives and Information Asymmetry, Potential Conflicts in the Principal-Agent Relationship

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Misaligned Incentives and Information Asymmetry, Potential Conflicts in the Principal-Agent Relationship

The CFA Institute Research Foundation has published a white paper authored by Sunit N. Shah, Strategist at Pine River Capital Management addressing the principal–agent relationships, and the associated potential problems, in finance.

“The relationship between a principal and the agent who acts on the principal’s behalf contains the potential for conflicts of interest. The principal–agent problem arises when this relationship involves both misaligned incentives and information asymmetry. In asset management, factors contributing to the principal–agent problem include managers’ compensation structures and investors’ tendency to focus on short-term performance. In the banking industry, myriad principal–agent relationships and complex instruments provide a fertile breeding ground for incentive conflicts, many of which were highlighted by the recent financial crisis.”

You may access the white paper through this link.

 

 

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