Question

One reason for the existence of agency problems between managers and stockholders is that_____

A) there is a significant degree of separation between management and ownership.
B) managers know how to manage the firm better than stockholders.
C) stockholders have unreasonable expectations about managerial performance.
D) none of the above.

Answer 1

Agency problems between managers and stockholders often arise due to the separation of management and ownership. As firms grow, this separation can lead to conflicts of interest, where managers might not always act in the best interest of the shareholders.

Step-by-step explanation:

One reason for the existence of agency problems between managers and stockholders is that there is a significant degree of separation between management and ownership. The concept of 'agency problems' refers to the conflicts of interest that arise when those who manage a company, the managers, have different goals than the owners or shareholders. As a firm grows and information about its products, revenues, costs, and profits become widely available, potential investors like bondholders and shareholders, who are not personally acquainted with the managers, can still decide to provide financial capital to the firm. This separation can lead to agency conflicts because managers may pursue their own interests rather than those aligned with shareholders' wealth maximization.