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

A shareholder-manager conflict in which a company's executives use corporate funds to buy luxury perquisites that do not add value for the firm is best described as an example of:

This is an agency problem. Managers are agents of the shareholders, and using corporate funds for personal perquisites serves the managers' interests at the owners' expense, which is the classic conflict between principals and agents in a corporation.

  1. Aan agency problemCorrect
  2. Ba free-rider problem
  3. Ca liquidity problem

Explanation

Managers (agents) act in their own interest rather than the owners' (principals') interest by consuming perquisites at shareholders' expense. This is the classic principal-agent conflict. A free-rider problem concerns shirking of contributions to a shared benefit, and a liquidity problem concerns meeting short-term obligations.

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