Which of the following statements is most accurate regarding agency problems? Se

Question

Which of the following statements is most accurate regarding agency problems?

Select one: a. An agency problem likely occurs when there is a conflict of interest between owners and agents

b. None of the choices are correct

c. An agency problem likely occurs when there is a conflict of interest between two senior managers

d. An example of an agency problem is when managers contracts are structured to be related to the price of the company’s stock (i.e. stock options)

e. An example of an agency problem occurs when manages take on more risky projects because they are most profitable

Explanation / Answer

Answer A: An agency problem likely occurs when there is a conflict of interest between owners and agents

As a result of the conflict of inerest, the agent may be tempted to act in his / her own interest rather than the principal’s which is inevitable. The agent bears the full burden of putting effort into the task delegated by the principal, but usually does not receive the benefits that results from these efforts in ful. This may create an incentive for the agent to put in less effort into the task than he or she would do if acting on his or her own behalf.. Hence , conflict of interest is the main problem attributed to the agency problems

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