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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' in the context of the objectives of financial management?

The agency problem is the conflict of interest between shareholders, who are the principals, and managers, who are their agents. Managers may pursue personal goals instead of maximising shareholder wealth, which creates agency costs such as monitoring and incentive expenses.

  1. AConflict of interest between shareholders (principals) and managers (agents) who run the company on their behalfCorrect
  2. BDifference between book value and market value of a company's equity shares
  3. CDelay in receipt of funds from debtors due to weak credit policy
  4. DMismatch between the maturity of short-term sources and long-term uses of funds

Explanation

The agency problem arises when managers, who act as agents of shareholders, pursue their own goals such as job security or size rather than maximising shareholder wealth. The other options describe valuation difference, receivables delay and maturity mismatch, which are not agency conflicts.

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