CFA Level I · CFA Level I Exam · Investors and Other Stakeholders
A company's CEO receives a bonus based solely on this year's reported net income. The CEO postpones a profitable but slow-payback equipment upgrade to protect current earnings. This behavior is best described as a conflict between:
This is a manager-shareholder (principal-agent) conflict. Because the bonus depends only on current net income, the CEO gains by delaying a value-adding investment, favoring short-term earnings over long-term shareholder value. It does not involve creditors or customers.
- Amanagers and shareholders over short-term versus long-term valueCorrect
- Bcreditors and shareholders over asset substitution
- Ccustomers and managers over product pricing
Explanation
Pay tied to current-year earnings encourages the manager (agent) to sacrifice long-term value for short-term results, which harms shareholders (principals). Asset substitution involves shifting to riskier projects, which is not described here.
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