The management of XYZ Corporation is considering acquiring another firm in an effort to expand the company. Stockholders of XYZ feel that the company is big enough and does not need to expand. This is an example of:
A) the principal-agent problem.
B) the principal problem.
C) asymmetric information.
D) skin-in-the-game.

Question

Quizplus · Accepted Answer

The principal-agent problem occurs when the interests of the principals (in this case, the stockholders) diverge from those of the agents (the management). Here, the management wants to expand by acquiring another firm, while the stockholders believe the company is already big enough and does not need to expand.

The Management of XYZ Corporation Is Considering Acquiring Another Firm