Asked by Randy Sandoval on Jun 01, 2024
Verified
Which one of the following actions is the best example of an agency problem?
A) Paying management bonuses based on the number of store locations opened during the year.
B) Paying management bonuses based on the current market value of the firm's stock.
C) Accepting a project that enhances both management salaries and the market value of the firm's stock.
D) Requiring stockholders approval of all management compensation decisions.
E) Basing management bonuses on the attainment of specific financial goals.
Agency Problem
A conflict of interest arising between principals (such as shareholders) and agents (like company executives) due to differing goals.
Store Locations
The specific physical points where a business operates or has commercial premises.
Market Value
The marketplace's current rate for the buy or sell transactions of assets or services.
- Acquire knowledge about the agency conflict and the way it impacts corporate operations.
Verified Answer
ZK
Zybrea KnightJun 03, 2024
Final Answer :
A
Explanation :
An agency problem occurs when the interests of management diverge from those of the shareholders. Paying management bonuses based on the number of store locations opened could incentivize management to focus on expansion regardless of whether it adds value to the firm, potentially harming shareholders' interests.
Learning Objectives
- Acquire knowledge about the agency conflict and the way it impacts corporate operations.
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