Which of the following statements is CORRECT?
A) One of the ways in which firms can mitigate or reduce potential conflicts between bondholders and stockholders is by increasing the amount of debt in the firm's capital structure.
B) The threat of takeover generally increases potential conflicts between stockholders and managers.
C) Managerial compensation plans cannot be used to reduce potential conflicts between stockholders and managers.
D) The threat of takeovers tends to reduce potential conflicts between stockholders and managers.
E) The creation of the Securities and Exchange Commission (SEC)has eliminated conflicts between managers and stockholders.

Question

Quizplus · Accepted Answer

The threat of takeovers serves as a mechanism to align the interests of managers with those of stockholders, as managers may lose their jobs if the company is taken over due to poor performance. This potential consequence motivates managers to act in the best interests of the shareholders to avoid a takeover.

Which of the Following Statements Is CORRECT