Which statement is correct about "agency cost of leasing"?
A)The lease payments are lowered to compensate for the agency cost of leasing.
B)Shorter lease terms decrease the agency cost of leasing.
C)Agency cost of leasing is an illustration of the "moral hazard" problem.
D)Agency cost of leasing is an illustration of the "adverse selection" problem.

Question

Quizplus · Accepted Answer

The agency cost of leasing arises due to the possibility of the lessee's lack of incentive to maintain the asset being leased as they do not own it. This is an illustration of the "moral hazard" problem, where incentives of the lessee and lessor are not properly aligned, leading to agency costs. Option A is incorrect, as lease payments are not lowered to compensate for the agency cost of leasing. Option B is incorrect, as shorter lease terms may increase the agency cost of leasing as the lessee may have less incentive to maintain the asset for a shorter period. Option D is incorrect, as adverse selection arises from a lack of information, whereas the agency cost of leasing arises due to moral hazard.

Which Statement Is Correct About "Agency Cost of Leasing