Moral hazard in equity contracts
In some instances, the seller of security is driven by incentives to conceal information from the purchaser and may engage in detrimental activities. This constitutes the problem of moral hazard in equity contracts. An example is the problem of Principal-Agent, which concerns the separation of possession and management of firms. The executives in corporations in this case only own a small share of the firm compared to the principals/share-holders. The managers then opt to pursue their interests at the expense of the firm's profitability bringing about a conflict of interest between the shareholders and corporate management (Banerji, and Basu ...