ACCA Strategic Professional · Strategic Business Leader · Agency
Dunmore Ltd's chief executive, three years from retirement, rejects a high-return, high-risk expansion that shareholders, who hold diversified portfolios, would favour. Which feature of the agency problem does this illustrate?
It shows differing risk attitudes and time horizons. A nearly retiring executive with career and wealth tied to the firm avoids risky projects, while diversified shareholders would accept the risk for the higher expected return, so the agent's choice diverges from the principals' interests.
- ADiffering risk attitudes and time horizons between managers and diversified shareholdersCorrect
- BInformation asymmetry about the competitive forces
- CExcessive dividend payout to shareholders
- DOver-reliance on stakeholder consultation
Explanation
Managers' careers and wealth are tied to the firm and their horizon is short, so they are more risk averse and short-termist than diversified shareholders who can spread risk. This divergence is an agency problem; dividends and consultation are not the issue.
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