Which of the following statements is correct?
A)Given the multi-owner nature of most large corporations, the agency costs associated with perquisite consumption are not really a problem.
B)Managers may operate in the stockholders' best interests, but they may also operate in their own personal best interests. As long as managers stay within the law, there simply are not any effective controls that stockholders can implement to affect managerial decision making.
C)The potential for agency problems is greatest when individual stockholders own extremely small proportions of the companies and managers have little, if any, of their own wealth tied up in these companies.
D)An agency relationship exists when one or more persons hire another person to perform some service but withhold decision-making authority from that person.
E)Managers rule out any potential conflicts of interest with the shareholders by selling the firm's stock to outsiders.

Question

Quizplus · Accepted Answer

This statement accurately describes the potential for agency problems to occur when small individual stockholders have little control over managerial decision-making. A and E are incorrect because the multi-owner nature of corporations does not eliminate agency costs associated with perquisite consumption, and selling stock to outsiders does not necessarily remove conflicts of interest. B is incorrect because there are various controls that can be implemented by stockholders to influence managerial decision-making, such as electing a board of directors or establishing performance incentives. D is incorrect because an agency relationship does not necessarily involve withholding decision-making authority - in fact, agents are often given some level of discretion to perform the service they were hired for.

Which of the Following Statements Is Correct