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Principal-Agent Case Study

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Principal – Agent Problem and Recent Corporate Failures Group – 8: Aditya Bhatia-150102007 Avishek Mitra-150103049 Kartik Parekh-150101059 Kriti Goel-150102051 Rishi Ranjan-150103133 Samir Singh-150102082 Shikha Shrivastava-150103161 The Principal-Agent problem takes place when a Principal creates an environment in which an agent's incentives don't align with that of the Principal. The Principal has to create incentives for the agent to ensure that the Agent acts as per his desire. An example of how the Principal-Agent problem occurs between ratings agencies and the companies (the Principals) that hire them to set a credit rating. As a low rating will increase the cost of borrowing for the company, it has an incentive …show more content…

He was found guilty of passing illegal tips to Raj Rajaratnam, co-founder of the Galleon Group LLC hedge fund.2 Rajat Gupta was sentenced to two years in prison. Gupta, allegedly confided in Raj Rajaratnam about the proposed investment of $5 billion by Warren Buffet in Goldman Sachs. This resulted in a gain of $ 8,00,000 in 24 hours for the fund manager as the trade was made before the news was made public. The reason behind the act is considered to be Gupta’s desire to make quick and handsome money in a short span of time. Gupta believed that people less competent and qualified than him were making big money and hence, he took the plunge and violated the norms laid out by Securities and Exchange Commission (SEC) of the U.S.3 The above case clearly explains the Principal-Agent problem that leads to inefficiency in performance of international markets. The Agent in this case was Rajat Gupta, who had an incentive to make quick money and thus, by passed the legalities and sold off critical information about the Principal i.e Shareholders of Goldman Sachs to an outsider. Had there not been this conflict of interests between the Principal and Agent, Gupta would never have committed this

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