Common stockholders may use financial ratios to monitor manager actions to help lessen agency problems.

Question

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Common stockholders have an incentive to monitor manager actions to ensure that they are acting in the shareholders' best interests. Financial ratios can be used by stockholders to evaluate the company's performance and assess whether managers are effectively using the company's resources. By doing so, stockholders can help prevent agency problems, where managers may act in their own self-interest rather than in the shareholders' interests.

Common Stockholders May Use Financial Ratios to Monitor Manager Actions