Final answer:
Managerial entrenchment or self-dealing occurs when managers prioritize their own interests over the firm's. It is a deviation from the expected behavior where managers are trusted to act for the benefit of the company's profitability and value to shareholders. Established firms rely less on personal knowledge of managers due to transparent corporate financial information.
Step-by-step explanation:
When managers take advantage of their position to further their own private interests rather than those of the firm, it is referred to as managerial entrenchment or self-dealing.
This behavior can manifest in various ways, such as making business decisions that benefit themselves at the expense of shareholders, engaging in excessive risk-taking, or misusing company resources for personal gain.
The core belief in a market-oriented economy is that firms, with their managers, are expected to act in the best interest of the company, focusing on attracting more customers, efficient production, and overall profitability.
Nevertheless, established firms attract financial capital from outside investors, like bondholders and shareholders, due to widely available information about the company's financial performance, which diminishes the need for personal knowledge of the individual managers.