The Principal-Agent Problem arises:
A)because managers have little incentive to work in the interest of shareholders when this means working against their own self-interest.
B)because of the separation of ownership and control in a corporation.
C)Both A and B
D)None of the above

Question

Quizplus · Accepted Answer

Both A and B are correct. The Principal-Agent Problem refers to the conflict of interest that arises between the shareholders (principal) and the managers (agent) of a corporation who act on the behalf of the shareholders. Managers may prioritize their self-interest or personal gains over the interest of shareholders. Moreover, in large corporations, the shareholders do not have direct control over the management decisions, leading to a separation of ownership and control, which further amplifies the principal-agent problem.

The Principal-Agent Problem Arises