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CS Executive · Corporate Accounting and Financial Management · Introduction to Financial Management

In the context of the agency problem in corporate finance, which situation represents a conflict between shareholders and managers?

Managers pursuing expansion for personal prestige even when projects earn less than the cost of capital is an agency conflict. The managers act in their own interest instead of maximising shareholder wealth, which is the core of the agency problem between owners and their agents.

  1. AShareholders wanting dividends declared at the rate they approve in the general meeting
  2. BManagers pursuing expansion for personal prestige even when the projects earn less than the cost of capitalCorrect
  3. CShareholders voting for appointment of an auditor
  4. DManagers preparing financial statements as per law

Explanation

An agency conflict arises when managers, acting as agents, pursue their own interests rather than maximising shareholder wealth. Empire-building through projects earning below the cost of capital destroys value. The other options are normal, lawful roles that do not show diverging interests.

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