Other people's money problem refers to the carelessness of principal's money by the agents. Now to solve this particular problem one option put forward is to provide managers executive stock options. The rationale here is that if managers money also involve in the company then the money they are handling that will not be other people's money because they themselves will own a portion of their stock. In addition, in this kind of arrangement own binding rule is that a manager cannot sale his ownership of company's stock at his will; it can only be sold after some time of his retirement. Hence, this kind of arrangement of tying managers' remuneration to the long-term performance of the company is useful in solving the 'other people's money' problem.
In spite of the specific advantage, this measure has a serious disadvantage too. This is because providing ownership to the managers mean that the power and owners interest in the company will be somewhat compromised.
A) The loss can be regarded as 'other people's money' type of agency cost. This is because if personal money is not involved in an investment decision, then people might become a bit careless while taking the final call. This is an important agency problem. This may arise for manager's myopic decision or various other issues.
B) The loss can be regarded as managers' myopic behavior. Managers' shortsighted behaviors in most of the cases create such problems.
C) The loss can be regarded as 'end of game' problem. This is a kind of horizon problem. It implies that at the end of one's carrier one would like to go for the projects, which will yield short-term gains by compromising potentially robust project, which may yield higher return in long term. This is a common problem among senior executives.
D) The given situation comes under manager's myopic behavior about obtaining short-term profit by neglecting value-increasing projects. Sometimes managers may be opportunistic to take undue risks in the short run projects by compromising long-term returns.
E) The given situation comes under income inflation kind of problem. Insiders or high rank executive managers manipulate company balance sheet in order to portray a better picture and send wrong signals to the stockholders.
A) The failure to incorporate the stock option based compensation costs in the firm's income statement could obviously lead to information asymmetry problem for outside stockowners. This is because if it is not incorporated in the income statement then it actually deflates firm's cost or expenditure part, which misleads stockholders about firm's actual financial health.
B) One method of solving this problem is to try to incorporate this cost in the income statement. The government might enforce it or somehow if it can be enforced in that case it will be able to give proper information about firm's credibility to the outside stockowners.