The existence of the principal-agent problem

Question

Quizplus · Accepted Answer

The principal-agent problem occurs when the goals of the principal (shareholders) are not aligned with the goals of the agent (management), leading to an increased risk of buying stock in a corporation. As management may prioritize their own interests over those of shareholders, there could be a lack of transparency, accountability, and competence resulting in lower stock prices and lower returns on investments. The existence of this problem does not necessarily increase the risk of becoming the sole proprietor of a business, as there is no agency relationship involved. The problem also does not imply that managers have the same incentives as the board of directors, as they may have different goals and motivations.

The Existence of the Principal-Agent Problem