A Disadvantage of Using Stock Options to Compensate Managers Is

question 40

Multiple Choice

A disadvantage of using stock options to compensate managers is that

• A) it encourages managers to undertake projects that will increase stock price.
• B) it encourages managers to engage in empire building.
• C) it can create an incentive for managers to manipulate information to prop up a stock price temporarily, giving them a chance to cash out before the price returns to a level reflective of the firm's true prospects.
• D) All of the above.

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Definitions:

Financial Statements

Structured reports that convey the financial activities and condition of a business or individual, including balance sheets, income statements, and statements of cash flows.

Warranty Liability

An obligation companies assume when they provide a promise to repair, replace, or refund products that fail to perform as expected.

Adjusting Entry

A journal entry made in accounting records at the end of an accounting period to allocate income and expenditure to the appropriate period.

Warranty Contract

An agreement where a seller promises to repair or replace a product if it breaks or malfunctions within a certain period of time.