CFA Level I · CFA Level I Exam · Organizational Forms, Corporate Issuer Features, and Ownership
A manager of a listed company chooses a low-risk strategy that protects the manager's job but forgoes positive-NPV projects that shareholders would favor. This situation is best described as a:
This is a principal-agent conflict between managers and shareholders. The manager, acting as agent, puts personal job security ahead of shareholders' interest in value-creating positive-NPV projects. It is not asset substitution, which means taking more risk, and no controlling shareholder is involved.
- Aprincipal-agent conflict between managers and shareholdersCorrect
- Bshareholder-creditor conflict over asset substitution
- Cconflict between controlling and minority shareholders
Explanation
Managers act as agents for shareholders, the principals. Putting personal job security ahead of value-creating projects is an agency conflict. Asset substitution involves shifting to riskier projects at creditors' expense, which is the opposite behavior. No controlling shareholder is described.
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