The Principal-Agent Problem

question 78

Multiple Choice

The principal-agent problem

• A)occurs when managers have more incentive to maximize profits than the stockholders-owners do.
• B)in financial markets helps to explain why equity is a relatively important source of finance for American business.
• C)would not arise if the owners of the firm had complete information about the activities of the managers.
• D)explains why direct finance is more important than indirect finance as a source of business finance.

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Definitions:

Parent Corporation

A larger corporation that owns more than half the stock of another firm, allowing it to control the subsidiary's management and operations.

Foreign Subsidiary

A company owned or controlled by another company (the parent) but located and operating in a country different from the parent company.

Statement Of Retained Earnings

A financial statement that outlines the changes in retained earnings for a specific period, typically impacted by net income and dividends distributed.

Functional Currency

The currency of the primary economic environment in which an entity operates and conducts its business, crucial for financial reporting.