Creditors and Shareholders May Have an Incentive Incompatibility Because

question 10

Multiple Choice

Creditors and shareholders may have an incentive incompatibility because:

• A) shareholders can declare bankruptcy and hence have limited liability.
• B) creditors must bear less risk than shareholders.
• C) creditors can call debt if better opportunities arise.
• D) shareholders choose projects with less risk than creditors would like.
• E) none of the above; creditors and shareholders are both interested in maximizing the profits of the enterprise.

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Definitions:

Stroop Task

A task invented by J. R. Stroop in which a participant sees a list of words (color terms) printed in an ink color that differs from the word named (e.g., green printed in blue ink). The participant is asked to name the ink colors of the words in the list and demonstrates great difficulty in doing so relative to a condition in which non-color words form the stimuli.

Prototype

An original model or first form of something from which other forms are copied or developed.

Exemplar

An individual instance or example that is representative of a category or concept, often used in models of categorization in cognitive psychology.