CA Inter P6 · Chapter 1 · Question 4 of 7
The conflict of interest that can arise when managers, acting as agents, pursue perks and job security rather than maximising the wealth of shareholders is known as the:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) Agency problem
Explanation
When ownership and management are separate, managers (agents) may act in their own interest rather than in the interest of shareholders (principals). This is the agency problem. The costs of monitoring, bonding and the residual loss that follow are called agency costs. Pecking order and clientele effect relate to financing and dividend theory.
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