Which one of the following actions is the best example of an agency problem?
A) Paying management bonuses based on the number of store locations opened during the year.
B) Paying management bonuses based on the current market value of the firm's stock.
C) Accepting a project that enhances both management salaries and the market value of the firm's stock.
D) Requiring stockholders approval of all management compensation decisions.
E) Basing management bonuses on the attainment of specific financial goals.

Question

Quizplus · Accepted Answer

An agency problem occurs when the interests of management diverge from those of the shareholders. Paying management bonuses based on the number of store locations opened could incentivize management to focus on expansion regardless of whether it adds value to the firm, potentially harming shareholders' interests.

Which One of the Following Actions Is the Best Example