The risk aversion problem in shareholder-manager agency relationships arises because:
A) managers are more risk-averse than shareholders.
B) shareholders prefer less risk than do managers.
C) managers have less capital invested in the entity than shareholders.
D) shareholders are not able to diversify their risk.

Question

Quizplus · Accepted Answer

Shareholders generally are willing to take on more risk than managers because they have a more diversified portfolio of investments. Managers, on the other hand, have a greater proportion of their personal wealth tied up in the company they manage, and therefore are more risk-averse. This creates a conflict of interest in the shareholder-manager agency relationship.

The Risk Aversion Problem in Shareholder-Manager Agency Relationships Arises Because