Moral hazard is a problem that can arise between management (agents) and stockholders (principals) because:

Question

Quizplus · Accepted Answer

Moral hazard arises because there is an asymmetry of information between the management (agents) and the stockholders (principals). Managers often have more information about the firm's operations and prospects than shareholders, making it difficult and potentially expensive for shareholders to monitor or obtain the same level of information. This can lead to situations where managers may act in their own interests rather than in the best interests of the shareholders.

Moral Hazard Is a Problem That Can Arise Between Management