In which of the following cases will the agency problem between shareholders and managers be the greatest?
A) 100% of the common stock is owned by the founder of the company who decided to retire and hired a manager to run his business for him.
B) The Johnson family owns 50% of the common stock of the company. The other 50% is owned by 5 mutual funds.
C) The common stock of the company is owned by many diverse shareholders, with no shareholder owning more than 1% of the outstanding stock.
D) All top managers in the company own significant amounts of stock and stock options.

Question

Quizplus · Accepted Answer

The agency problem between shareholders and managers is greatest when ownership is highly fragmented, as in option C, where no shareholder owns more than 1% of the stock. This dispersion makes it difficult for shareholders to monitor and influence managerial actions effectively.

In Which of the Following Cases Will the Agency Problem