Which one of the following actions by a financial manager creates an agency problem?
A)Borrowing money when doing so creates value for the firm
B)Lowering selling prices that will result in increased firm value
C)Agreeing to expand the company at the expense of stockholders' value
D)Agreeing to pay management bonuses based on the market value of the firm's stock
E)Refusing to spend current cash on an unprofitable project

Question

Quizplus · Accepted Answer

An agency problem occurs when the actions of a decision-maker (agent) conflict with the best interests of those the decision-maker is supposed to serve (principals). In this case, expanding the company at the expense of stockholders' value creates an agency problem because it prioritizes other goals over the financial interests of the stockholders, who are the principals.

Which One of the Following Actions by a Financial Manager