Question

Which of the following statements is true?

- Shareholders have little or no ability to force managers to pursue maximization of the firm's value.
- Equity ownership by managers is thought to be one of the most effective corporate control mechanisms.
- Reducing the amount of debt financing can reduce the divergence between the shareholders' interests and the owner's interests.
- The effectiveness of a board of directors in monitoring managers will be enhanced by appointing members from the firm who are well-informed about the management problems facing the firm.

Answer 1

Equity ownership by managers aligns their interests with shareholders and is an effective control mechanism, making the statement that equity ownership by managers is thought to be one of the most effective corporate control mechanisms true.

Step-by-step explanation:

When analyzing which of the following statements is true regarding corporate governance, it becomes clear that equity ownership by managers is generally thought to be an effective corporate control mechanism. Managers who own equity have a personal financial interest in the success of the company, aligning their interests with those of the shareholders. Therefore, any divergence between the interests of the shareholders and the interests of the managers can be lessened, as both have a stake in the firm's value maximization. Venture capitalists are another group who by owning a significant portion of the firm have the incentive to closely monitor management's performance. This close relationship also aids in reducing informational asymmetries and ensures that the firm is run well.