In which of the following scenarios would you expect agency problems to be most prevalent?
A)in a firm that is transparent--i.e., the expected cash flows and costs of capital can easily be calculated even by outsiders.
B)in a small company with one owner and only a few employees
C)in a firm that relies heavily on research and development
D)when a firm's projects are short-term, and interim progress reports are forthcoming and deemed fairly accurate

Question

Quizplus · Accepted Answer

When a firm relies heavily on research and development, the agency problem is more prevalent as the managers may prioritize their own interests over the interests of the shareholders. This is because the success of the R&D projects may not be reflected in the short-term financial statements, and the managers may be tempted to delay projects or manipulate data to maintain their positions. In contrast, options A, B, and D provide higher transparency and accountability, reducing agency problems. In a firm that relies heavily on research and development, agency problems are most prevalent because the success of the firm's projects depends heavily on the efforts of key employees, which creates an incentive for those employees to shirk their work or take actions that benefit themselves at the expense of the firm. This is particularly true in firms that have limited transparency about the expected success of R&D projects, making it difficult for outsiders to judge the value of the efforts of key employees.

In Which of the Following Scenarios Would You Expect Agency