Which one of the following actions by a financial manager is most apt to create an agency problem?
A) Refusing to borrow money when doing so will create losses for the firm
B) Refusing to lower selling prices if doing so will reduce the net profits
C) Refusing to expand the company if doing so will lower the value of the equity
D) Agreeing to pay bonuses based on the market value of the company's stock rather than on its level of sales
E) Increasing current profits when doing so lowers the value of the company's equity

Question

Quizplus · Accepted Answer

Agency problems occur when the interests of the managers diverge from those of the shareholders. Increasing current profits at the expense of the company's equity value may benefit managers in the short term (e.g., through bonuses tied to short-term performance) but harm shareholders who are invested in the long-term value of the company.

Which One of the Following Actions by a Financial Manager