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IAI Actuarial Core Principles · Business Finance · Corporate governance and the regulation of companies

In corporate finance, an agency problem between shareholders and managers arises primarily because:

The agency problem arises because managers act as agents for shareholders but may pursue their own interests, and shareholders cannot fully observe or control what managers do. This separation of ownership and control, together with information asymmetry, creates the conflict of interest.

  1. AManagers own all the shares of the company and ignore creditors
  2. BManagers act on behalf of shareholders but may pursue their own interests, and shareholders cannot fully observe their actionsCorrect
  3. CShareholders are legally prohibited from appointing directors
  4. DDebt holders have voting control over every decision
  5. The company is required to distribute all profits as dividends

Explanation

An agency problem exists where ownership and control are separated. Managers (agents) may pursue their own goals such as pay, status or empire building, while shareholders (principals) face information asymmetry and cannot monitor every action. The other options describe situations that are not the source of this conflict.

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