Under which conditions are shareholders most likely to be concerned about agency conflicts?
A) Growth firm with financing needs that use most of the firm's available cash flows
B) Young firm with negative free cash flows
C) Large free cash flows generated by a mature firm
D) Mature firm with a low retention ratio and frequent stock repurchases

Question

Quizplus · Accepted Answer

Shareholders are most likely to be concerned about agency conflicts when a mature firm has large free cash flows. This is because the availability of excess cash may encourage managerial actions that are not in the best interests of shareholders, such as wasteful spending, empire-building, or pursuing self-serving projects that do not add value to the firm. Additionally, the lack of investment opportunities for the excess funds may result in pressure from shareholders for distributions, leading to conflicts over dividend policy and share repurchases.

Under Which Conditions Are Shareholders Most Likely to Be Concerned