Because managers (________)have less incentive to maximize profits than the stockholders-owners (________)do,stockholders find it costly to monitor managers; thus,stockholders are reluctant to purchase equities.
A) principals; agents
B) principals; principals
C) agents; agents
D) agents; principals

Question

Quizplus · Accepted Answer

In this context, managers are considered agents because they are tasked with operating the company on behalf of the stockholders. The stockholders are the principals, as they own the company and delegate the management responsibilities to the agents (managers). This relationship can lead to a principal-agent problem where the interests of the managers (agents) may not perfectly align with those of the stockholders (principals), hence the reluctance of stockholders to purchase equities due to the costs of monitoring managers' performance.

Because Managers (________)Have Less Incentive to Maximize Profits Than the Stockholders-Owners