Which of the following are characteristic of principal-agent conflicts that ofte

Question

Which of the following are characteristic of principal-agent conflicts that often exist in a firm? (Note: The entire statement must be true in order to be a correct answer.) a. Managers do not always operate in the best interest of owners because owners are generally more risk averse than managers. b. Managers generally have a shorter time horizon than owners; thus, managers do not fully take into account the future long-run profitability of the firm. c. Managers do not always operate in the best interest of owners because managers care about the non-cash benefits of their jobs. d. Firms can usually find solutions that reduce agency costs without increasing monitoring or incentive costs.

Explanation / Answer

Correct option (b).

Managers mostly have a myopic vision, so they care most about the short run gains for the firm (and/or for themselves), unlike the owners who have a longer run vision about operations and profitability.

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