ACCA Strategic Professional · Strategic Business Leader · Agency
Orrin plc's shareholders cannot observe whether the finance director is exerting full effort or making decisions that only benefit herself, because she holds far more information about operations than they do. Which term describes this underlying cause of agency problems?
The cause is information asymmetry. The agent has more knowledge about operations and her own effort than the principals, who cannot observe it cheaply, so she can act opportunistically and shareholders must spend on monitoring to reduce the risk.
- AInformation asymmetryCorrect
- BEconomies of scope
- CCorporate parenting
- DPath dependency
Explanation
Agents know more about the business and their own actions than principals, who cannot cheaply observe effort or decisions. This information asymmetry enables opportunistic behaviour and drives the need for monitoring. The other terms are unrelated strategy concepts.
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