Which of the following statements is most correct?
A) Agency conflicts between stockholders and managers are not really a problem when outsiders (i.e., non-managers) own shares in a corporation.
B) Managers may operate in stockholders' best interests, or managers may operate in their own personal best interests. As long as managers stay within the law, there are no effective controls that stockholders can implement to control managerial decision making.
C) The agency conflicts between bondholders and stockholders can be reduced with the use of bond covenants.
D) An agency relationship exists when one or more persons hire another person to perform some service but withhold decision-making authority from that person.
E) All of the statements above are false.

Question

Quizplus · Accepted Answer

Bond covenants can help reduce agency conflicts between bondholders and stockholders. These covenants specify certain actions or limitations that the firm must abide by in order to protect the bondholders' interests. For example, bond covenants can limit the amount of debt the company can take on, require the maintenance of certain financial ratios, or restrict the payment of dividends. This helps to align the interests of bondholders and stockholders and reduce potential conflicts. The other statements are either incorrect or incomplete.

Which of the Following Statements Is Most Correct