Which one of the following best illustrates the agency problem?
A) An employee offers a suggestion which will save the company money and reduce the stress of his job.
B) The company creates a management bonus program whereby managers are rewarded when the market price of the firm's stock rises.
C) Management rejects a merger which was desired by the shareholders.
D) Management expands its operations overseas which is favourably received by the financial markets.
E) Management reduces the risk level of the firm while maintaining a steady stock price.

Question

Quizplus · Accepted Answer

The agency problem occurs when the interests of management and shareholders diverge. In choice C, management's rejection of a merger desired by the shareholders directly illustrates this conflict of interest, where management's decisions do not align with the desires or benefits of the shareholders.

Which One of the Following Best Illustrates the Agency Problem