Which of the Following Actions Would Be Likely to Reduce

question 23

Multiple Choice

Which of the following actions would be likely to reduce potential conflicts of interest between stockholders and managers?

• A) Congress passes a law that severely restricts hostile takeovers.
• B) A firm's compensation system is changed so that managers receive larger cash salaries but fewer long-term options to buy stock.
• C) The company changes the way executive stock options are handled,with all options vesting after 2 years rather than having 20% of the options awarded vest every 2 years over a 10-year period.
• D) The company's outside auditing firm is given a lucrative year-by-year consulting contract with the company.
• E) The composition of the board of directors is changed from all inside directors to all outside directors,and the directors are compensated with stock rather than cash.

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Definitions:

Relative Prices

The price of one good or service compared to another, often used to indicate the value or cost-effectiveness between different items.

Substitution Effect

Substitution Effect occurs when consumers replace more expensive items with cheaper alternatives in response to changes in relative prices, holding their overall satisfaction constant.

Relative Prices

Relative prices express the price of one good or service in comparison to another, revealing their value relative to each other rather than in absolute monetary terms.

Inferior Good

A type of good for which demand decreases as the income of the consumer increases, in contrast to normal goods where demand increases with rising income.