Under which conditions are shareholders most apt to be concerned about agency conflicts?
A) Growth firm with financing needs that use most of the firm's available cash flows
B) Young firm with negative free cash flows
C) Large free cash flows generated by a mature firm that offers high perks
D)Mature firm with a low retention ratio and frequent stock repurchases

Question

Quizplus · Accepted Answer

Shareholders are most apt to be concerned about agency conflicts when a mature firm generates large free cash flows and offers high perks to executives. This is because executives may use these extra cash flows for personal benefit rather than investing in the firm's growth or paying out dividends to shareholders. This can result in a misalignment of interests between managers and shareholders, leading to agency conflicts. Option A is incorrect because growth firms with financing needs generally have limited free cash flows, so agency conflicts may be less of a concern. Option B is incorrect because young firms with negative free cash flows are more focused on survival and growth than on agency conflicts. Option D is incorrect because a mature firm with a low retention ratio and frequent stock repurchases may be perceived positively by shareholders since it indicates a willingness to return excess cash to shareholders.

Under Which Conditions Are Shareholders Most Apt to Be Concerned