Which of the following statements is CORRECT?
A) Compensating managers with stock options can do nothing to help eliminate potential conflicts between stockholders and managers.
B) Restrictions can be included in credit agreements, but these restrictions can do nothing to protect bondholders from conflicts of interest between them and the firm's managers and stockholders.
C) The threat of takeovers reduces conflict of interest problems, but only between bondholders and stockholders.
D) Compensating managers with stock options can help reduce conflicts of interest between stockholders and managers, but if the options are all exercisable on a specific date in the near future, this can motivate managers to do something other than try to maximize the stock's intrinsic value.
E) Conflicts would not exist if the Security and Exchange Commission were abolished.

Question

Quizplus · Accepted Answer

Compensating managers with stock options can help reduce conflicts of interest between stockholders and managers. However, if the options are all exercisable on a specific date in the near future, this can motivate managers to do something other than try to maximize the stock's intrinsic value, as they may be more focused on increasing the stock price in the short term rather than the long term. Therefore, it is important to properly structure and time the issuance of stock options to align the interests of managers with those of the company's stockholders. None of the other statements are correct.

Which of the Following Statements Is CORRECT