Question

In the context of agency theory, information asymmetry refers to the idea that

A. Information can vary in its reliability.
B. Information can vary in its relevance.
C. Management has more information about the entity's true financial position than do the absentee owners (i.e. stockholders).
D. Management likely will not act in the best interests of the absentee owners.

Answer 1

Information asymmetry in agency theory means that management has more information about the company's financial position than the stockholders. The correct answer is option C.

Step-by-step explanation:

In the context of agency theory, information asymmetry refers to a situation in which there is an imbalance in information between two parties. Specifically, it means that management (agents) have more information about the entity's true financial position than do the absentee owners (stockholders). The correct answer to the question is option C. This concept is crucial in understanding the challenges in agent-principal relationships, where the principal (stockholders) may not have the same level of access to information as the agent (management), potentially leading to a conflict of interests.