Final answer:
Mechanisms to mitigate potential agency problems include financial statements, audits, and stock options, all of which work to align the interests of management with shareholders and provide oversight. The correct answer is 'd) All of the above'.
Step-by-step explanation:
Mechanisms for mitigating potential agency problems include various measures that can be implemented within a corporation. An agency problem arises when there is a conflict of interest between the stakeholders, such as between the shareholders (principals) and the company management (agents). To address potential agency problems, several mechanisms can be utilized:
- Financial statements - They provide transparency for shareholders, showing how the management is handling the company's finances.
- Audits - They are used to independently verify the accuracy of financial statements, ensuring that the shareholders have a true and fair view of the company's financial position.
- Stock options - As a form of compensation, they can align the interests of the managers with those of the shareholders since the value of options is linked to the company's stock performance.
- All of the above - Together, these mechanisms work towards minimizing potential agency problems by aligning the interests of the management with those of the shareholders and ensuring appropriate oversight and transparency.
The correct answer to the student's question would be 'd) All of the above,' as financial statements, audits, and stock options are all measures that can help in mitigating potential agency problems.