Skip to content

CFA Level I · CFA Level I Exam · Investors and Other Stakeholders

A listed company's managers are paid mostly through annual cash bonuses tied to current-year earnings. Shareholders are most likely to be concerned that managers will:

Managers are most likely to favor short-term profit at the expense of long-term value. Annual bonuses linked to current earnings reward near-term results, so managers may cut valuable investment or take shortcuts, creating an agency conflict with shareholders who care about long-term value.

  1. Aunderinvest in short-term earnings to protect creditors
  2. Bfavor short-term profit at the expense of long-term valueCorrect
  3. Cseek lower pay than is typical for the industry

Explanation

Bonuses tied to current earnings encourage managers to boost near-term results, for example by cutting investment, even if long-term shareholder value falls. This is a principal-agent problem. The other options contradict the incentive created.

Did you get it right without looking?

One question tells you little. A timed set on Investors and Other Stakeholders shows your real accuracy, how long you take and where you lose marks.

Practise Investors and Other StakeholdersFree diagnostic mock

More Investors and Other Stakeholders questions