Which of the following statements is true of agency problems?
A) Regardless of economic conditions, if a firm's stock price falls during the year, this indicates that the firm's managers must not be acting in the best interests of the shareholders.
B) One method of controlling agency problems is to engage in the taking of "poison pills."
C) One of the best means to control agency problems is to require the managers and other important decision makers of the firm to also be owners of the firm.
D) Agency problems probably would not exist if the important decisions of a firm were made by persons who have no vested interests, such as ownership, in the firm.
E) Shareholders solve the agency problems by hostile takeover of the firm from the managers.

Question

Quizplus · Accepted Answer

Requiring managers and decision makers to also be owners of the firm aligns their interests with those of the shareholders, reducing the likelihood of agency problems. The other options are incorrect: A is incorrect because a falling stock price could indicate many factors, not just agency problems; B is incorrect because poison pills are a defence against hostile takeovers, not agency problems; D is incorrect because having decision makers without any vested interests in the firm could lead to a lack of accountability and motivation; and E is incorrect because hostile takeovers are not always a viable solution and can be costly.

Which of the Following Statements Is True of Agency Problems