When managers do NOT own very much of the net worth of the firm,then
A) there may be a principal-agent problem.
B) the firm will usually have to raise most of its funds in financial markets.
C) the firm will have to rely more on equity financing than debt financing.
D) the firm will have to rely more on debt financing than equity financing.

Question

Quizplus · Accepted Answer

When managers do not own a substantial portion of the net worth of the firm, they may not have the same interests as the shareholders, which can result in a principal-agent problem. This means that the managers may prioritize their own interests over those of the shareholders, which can lead to issues such as excessive risk-taking, poor investment decisions, and lack of accountability. Therefore, it is important for managers to have a stake in the company's stock to align their interests with those of the shareholders. Options B, C, and D do not necessarily follow from the lack of manager ownership.

When Managers Do NOT Own Very Much of the Net