There is a tendency for CEOs of larger companies to earn more money than CEOs of smaller companies.Suppose a CEO decides to acquire another company,thus increasing the size of the CEO's firm.Suppose also that the price of the stock of the acquiring firm falls when it learns of the upcoming acquisition.This appears to be an example of ________.

Question

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This is an example of the principal-agent problem. The CEO, as the agent, may be pursuing their own interests (earning a higher salary as a CEO of a larger company) rather than the interests of the shareholders, who may not benefit from the acquisition. The falling stock price indicates that the market is not favorable towards the acquisition, which may have negative effects on the shareholders.

There Is a Tendency for CEOs of Larger Companies to Earn