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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 financial management objective of a company?

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, so firms use monitoring, incentives and disclosure to align the two parties' interests.

  1. AConflict of interest between shareholders (principals) and managers (agents) who run the firm on their behalfCorrect
  2. BDifference between book value and market value of a firm's shares
  3. CDelay between the time a firm raises funds and the time it invests them
  4. DConflict between a firm's current assets and its current liabilities

Explanation

The agency problem arises because managers, who act for the owners, may pursue their own goals such as job security or higher perks rather than maximising shareholder wealth. The other options describe unrelated ideas: valuation gaps, timing of funds, and liquidity.

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