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CFA Level I · CFA Level I Exam · Organizational Forms, Corporate Issuer Features, and Ownership

A company's shareholders hire managers to run the firm on their behalf. The managers may pursue their own interests rather than maximizing shareholder value. This conflict is best described as a:

This is a principal–agent problem. Shareholders are the principals who delegate decision making to managers, the agents. Because managers may pursue their own goals, such as perks or empire building, rather than shareholder wealth, their interests diverge from those of the owners.

  1. Aprincipal–agent problemCorrect
  2. Bliquidity problem
  3. Climited liability problem

Explanation

Shareholders (principals) delegate decisions to managers (agents), whose interests may differ from theirs. This is the principal–agent, or agency, problem. Liquidity and limited liability describe different issues and do not capture this divergence of interests.

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