CFA Level I · CFA Level I Exam · Investors and Other Stakeholders
Executives whose bonuses depend entirely on short-term earnings cut research spending to meet quarterly targets, harming long-term value. This outcome is most likely a result of:
The outcome most likely results from compensation misaligned with long-term shareholder interests. Bonuses tied to short-term earnings encourage managers to cut research spending to hit targets, sacrificing long-term value, which is a principal-agent problem fixed by long-term incentives.
- Acompensation misaligned with long-term shareholder interestsCorrect
- Bshareholders being given excessive voting rights
- Ccreditors imposing restrictive covenants
Explanation
Pay tied only to short-term earnings gives managers incentive to boost near-term results at the expense of long-term value. This is an agency problem addressed by aligning compensation with long-term performance. Voting rights and covenants are unrelated to the described behavior.
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.
More Investors and Other Stakeholders questions
- A highly leveraged company announces a special dividend funded by selling most of its liquid assets. Existing bondholders are most likely to…
- A manufacturer's board is deciding whether to close a plant. Under the stakeholder management framework, which approach is most appropriate …
- A listed company's managers are paid mostly through annual cash bonuses tied to current-year earnings. Shareholders are most likely to be co…
- A company is nearing financial distress. Which stakeholder is most likely to prefer that management take on a high-risk, high-variance inves…
- A company's board chair is also its chief executive officer, and most directors were appointed by the chair and have long personal ties to m…
- A government-owned airline is listed on a stock exchange, with the state holding 60% of the shares and private investors holding 40%. Relati…