CFA Level I · CFA Level I Exam · Investors and Other Stakeholders
A manager of a listed company chooses to expand through a large acquisition that increases the size of the firm and her own pay, even though the deal is expected to lower shareholder value. This situation is best described as a conflict between:
This is a conflict between shareholders and the manager. The manager, as agent, pursues personal gain through a larger firm and higher pay while destroying shareholder value, which is the classic principal-agent problem, rather than a creditor or minority-shareholder conflict.
- Ashareholders and the manager (agent)Correct
- Bshareholders and bondholders
- Ccontrolling and minority shareholders
Explanation
The manager acts in her own interest (pay and empire building) at the expense of owners who hired her. This is the classic principal-agent conflict between shareholders and management. The other conflicts involve creditors or different classes of owners, not management's self-interest.
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