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ACCA Applied Skills · Financial Management · The nature and purpose of financial management

Which of the following best describes the agency problem in a listed company?

The agency problem is the conflict that arises when managers, acting as agents for shareholders, pursue their own interests, such as pay or job security, instead of maximising shareholder wealth, because ownership is separated from control.

  1. AManagers, who act as agents of shareholders, may pursue their own interests rather than maximising shareholder wealthCorrect
  2. BShareholders may sell their shares at a price below the intrinsic value of the company
  3. CLenders may demand a higher interest rate when a company's gearing rises
  4. DDirectors may be unable to raise finance because of weak financial markets

Explanation

The agency problem arises from the separation of ownership and control. Managers (agents) run the company for shareholders (principals) but may put their own interests, such as pay, status or job security, ahead of shareholder wealth. The other options describe pricing, lender risk and funding constraints, not a conflict between principal and agent.

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