Discuss two ways in which a shareholder can mitigate the problem of moral hazard when investing in a company.

Question

Quizplus · Accepted Answer

The Answer is To mitigate this moral hazard problem, audit reports can be used to provide information to owners about the firm's performance as an indirect indicator of management performance.
Compensation can be linked to performance measures such as net income or earnings per share.
Ask management to take partial ownership of the company through stock purchase and stock option programs. The thought being that if managers share in the rewards of their efforts, they will thus be more motivated to create value for the company's owners.

Discuss Two Ways in Which a Shareholder Can Mitigate the Problem