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

Which of the following best describes the agency problem between shareholders and managers in a company?

The agency problem is that managers, acting as agents, may pursue their own interests instead of maximising shareholder wealth. It arises from the separation of ownership and control, and is reduced through incentives such as stock options and monitoring.

  1. AManagers may pursue their own interests rather than maximise shareholder wealthCorrect
  2. BShareholders directly manage daily operations and neglect creditors
  3. CCreditors hold voting control over all managerial decisions
  4. DManagers are legally barred from receiving incentive pay

Explanation

Agency problem arises from separation of ownership and management, where managers (agents) may act in their own interest instead of the shareholders' (principals). Other options misstate the relationship.

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