Question

Which one of the following actions by a financial manager is most apt to create an agency problem?

a) Refusing to borrow money when doing so will create losses for the firm: True/ False
b) Refusing to lower selling prices if doing so will reduce the net profits: True/ False
c) Refusing to expand the company if doing so will lower the value of the equity: True/ False
d) Agreeing to pay bonuses based on the market value of the company stock rather than on the firm's level of sales: True/ False
e) Increasing current profits when doing so lowers the value of the firm's equity: True/ False

Answer 1

The action by a financial manager that is most apt to create an agency problem is agreeing to pay bonuses based on the market value of the company stock rather than on the firm's level of sales.

Step-by-step explanation:

Out of the given options, the action by a financial manager that is most apt to create an agency problem is d) Agreeing to pay bonuses based on the market value of the company stock rather than on the firm's level of sales. This is because when bonuses are tied to the market value of the company stock, the financial manager may prioritize short-term actions that boost stock prices, even if those actions have a negative impact on the firm's long-term profitability or value. This can create a conflict of interest between the financial manager and the firm's shareholders, potentially leading to an agency problem.