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  • What is the principal-agent problem in corporate finance?Option

What is the principal-agent problem in corporate finance?

Option: 1

The issue of shareholders having more information than company executives.


Option: 2

The conflict of interest that arises when company executives act in their own interests rather than in the interests of shareholders.


Option: 3

The situation where all stakeholders in a company have equal access to information.


Option: 4

The problem of shareholders not having any control over company decisions


Answers (1)

best_answer

The principal-agent problem in corporate finance refers to the conflict of interest that occurs when the shareholders (the principals) of a company delegate decision-making authority to company executives (the agents), such as CEOs and managers. These agents may prioritize their own interests, such as maximizing their own compensation or job security, over the interests of the shareholders. This misalignment of interests can lead to decisions that may not be in the best interest of the shareholders, potentially harming the value of the company. It is a significant challenge in corporate governance and can affect the overall performance and accountability of a company. hence option b is correct.

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