Venture capital firms attempt to overcome the principal-agent problem by
A)investing only in industries with high profit rates.
B)charging high interest rates on loans.
C)holding large equity stakes in the firms they invest in.
D)avoiding investing in common stock.

Question

Quizplus · Accepted Answer

Holding large equity stakes in the firms they invest in aligns the interests of venture capital firms with the firm they invest in, reducing the principal-agent problem. By having a significant ownership stake, venture capital firms have more influence over the firm's decisions and outcomes, incentivizing them to work towards the common goal of maximizing the value of the firm. Investing in industries with high profit rates or charging high interest rates on loans does not address the principal-agent problem directly. Avoiding investing in common stock may limit the potential upside for both the venture capital firm and the firm they invest in.

Venture Capital Firms Attempt to Overcome the Principal-Agent Problem by