Of the following, which statement regarding agency costs is false?
A) An agency problem exists when there is a conflict of interest between the stockholders and management of a firm.
B) An agency problem exists when there is a conflict of interest between a principal and an agent.
C) An indirect agency cost occurs when firm management avoids risky projects that would favourably affect the stock price because the managers are worried about keeping their jobs.
D) A corporate expenditure that benefits stockholders but harms management is an agency cost.
E) If agency costs get too high in the eyes of shareholders, they can begin a proxy fight to replace existing management.

Question

Quizplus · Accepted Answer

Agency costs refer to the costs associated with resolving conflicts of interest between principals (such as shareholders) and agents (such as company managers). Statement D is false because an agency cost typically involves expenditures or losses incurred to monitor, manage, or mitigate conflicts of interest between shareholders and management, not expenditures that benefit stockholders but harm management.

Of the Following, Which Statement Regarding Agency Costs Is False