ACCA FM · Chapter 1 · Question 2 of 10
In the context of corporate finance, what is meant by the 'agency problem'?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) Directors, acting as agents of the shareholders, may pursue their own interests rather than maximising shareholder wealth
Explanation
The agency relationship arises because shareholders (principals) delegate the running of the company to directors (agents). Where ownership is separated from control, directors may act in their own interests, for example by awarding themselves excessive pay or avoiding risky but worthwhile projects. This conflict of interest is the agency problem.
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