The principal-agent problem
A)occurs when managers have more incentive to maximize profits than the stockholders-owners do.
B)in financial markets helps to explain why equity is a relatively important source of finance for American business.
C)would not arise if the owners of the firm had complete information about the activities of the managers.
D)explains why direct finance is more important than indirect finance as a source of business finance.

Question

Quizplus · Accepted Answer

The principal-agent problem arises when there is a conflict of interest between the principal (owners or shareholders) and the agent (managers), often due to asymmetric information, where the agent has more information than the principal. If the owners had complete information about the managers' activities, this problem would not occur because they could perfectly monitor and ensure that managers act in the owners' best interests.

The Principal-Agent Problem