CFA Level I · CFA Level I Exam · Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits
A listed company's CEO receives a bonus based solely on this year's reported earnings per share. The CEO cuts research spending sharply to lift this year's earnings, harming long-term value. This behavior is most likely an example of:
The behavior is managerial short-termism arising from an agency conflict. Because the bonus depends on current-year earnings per share, the CEO benefits from cutting research spending even though this reduces long-term shareholder value. Compensation design misaligned with shareholders' long-run interests causes this outcome.
- Amanagerial short-termism arising from an agency conflictCorrect
- Ba conflict between creditors and bondholders
- Ca legitimate stakeholder-aligned strategy
Explanation
Pay tied to near-term earnings encourages the agent to sacrifice long-term shareholder value, which is an agency problem showing short-termism. Creditors and bondholders are the same group, so the second option is meaningless, and the third contradicts the harm to long-term value.
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