The Principal-Agent Problem in Corporations Exists Because the Managers of a Firm

question 27

Multiple Choice

The principal-agent problem in corporations exists because the managers of a firm:

• A) may pursue their own goals even when the result is lower profit for owners.
• B) may know how to operate the business better than absentee owners do, and yet not be allowed to.
• C) are generally unable to do the monitoring that would result in the firm's avoiding moral hazard problems.
• D) are generally unable to do the monitoring that would result in the firm's avoiding adverse selection.
• E) are generally unable to monitor workers, who do not care about the profits due the managers.

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Definitions:

Consolidated Balance Sheet

A financial statement that aggregates the assets, liabilities, and equity of a parent company and its subsidiaries.

Subsidiary Company

A company that is controlled by another company, often referred to as the parent company, through ownership of more than half of its voting stock.

Joint Venture

A business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task or business activity.

Equity Method

An accounting technique used to record investments in other companies, where the investment is initially recorded at cost and subsequently adjusted for the investor's share of the investee's profits or losses.