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CA Intermediate · Financial Management and Strategic Management · Scope and Objectives of Financial Management

The agency problem between shareholders and managers in a company arises primarily because:

The agency problem arises because ownership and management are separated, so managers acting as agents may pursue personal goals rather than maximise shareholders' wealth. Firms incur agency costs, such as monitoring and incentives like ESOPs, to align managers' interests with those of owners.

  1. AManagers, as agents, may pursue their own interests instead of maximising shareholder wealthCorrect
  2. BShareholders are not entitled to receive dividends
  3. CDebt providers control all decisions of the board
  4. DThe company has more than one class of shares

Explanation

Agency problem arises from separation of ownership and management: managers act as agents of shareholders but may put personal goals, such as job security or perks, ahead of shareholder wealth. Agency costs such as monitoring and incentive schemes like ESOPs are used to align interests. The other options do not describe this conflict.

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