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ACCA Applied Skills · Financial Management · Stakeholders and impact on corporate objectives

A company's managers reject a project with a positive NPV because it is risky and could threaten their jobs if it fails. Which behaviour does this best illustrate?

This illustrates managers being more risk averse than shareholders. Diversified shareholders want all positive NPV projects accepted, but managers fear personal loss of their jobs if a risky project fails, so they reject value-adding investments.

  1. AManagers taking excessive risks to boost their bonuses
  2. BManagers being more risk averse than shareholders, who hold diversified portfoliosCorrect
  3. CManagers maximising sales revenue instead of profit
  4. DManagers manipulating the dividend to signal good news

Explanation

Shareholders with diversified portfolios can tolerate project-specific risk and want positive NPV projects accepted. Managers, whose jobs and income depend on the one company, may avoid them. This is risk aversion, not excessive risk taking, revenue maximisation or dividend signalling.

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