The impact of agency problem on the financial performance of an organization: A case study from the telecom sector of Pakistan i.e. the merger of Jazz & Warid

Abstract

An agency problem arises when the manager of an organization owns less than 100% of the organization’s stock. Let’s assume in a scenario where there is a proprietorship which is managed by its owner, the owner will work to maximize his own welfare, and it is measure by the increased profits earned through the business. In case, the owner decides to sell some of the stocks to the outside world, there arises a conflict. In this scenario a manager may decide not to distribute much to the shareholders in order to keep those earnings to themselves. Also, they would be trying to live a life with more leisure and spend more as that would be done from the funds given by the shareholders. The outcome of this research study clearly states that the agency problem does have an impact on the financial performance of an organization. It is clear from the research in a current scenario that the agency problem plays an adverse role in the financial performance of the organization.. Moreover, the managers working at the organizations are always concerned with the moral hazards which they face all the time when it comes choose between either to fulfill their own goals or that of the organizations. It has been noticed that different organizations practice different compensation practices, but typically it is designed and structured as follows; annual salary, annual bonuses and option to purchase stock of the company. It has been observed that if managers are likely to get the share in the organization’s stocks, then they will make all efforts to increase its value as it will benefit them ultimately. It is a common practice that large organizations gives performance shares to the senior executives on performing well; they get shares as per the organization’s performance. Also, the size of the board affects the overall financial performance of an organization; the size of the board affects the agency cost being bear by the organization