Which one of the following actions by a financial manager creates an agency problem?
A) Refusing to borrow money when doing so will create losses for the firm
B) Refusing to lower selling prices if doing so will reduce the net profits
C) Agreeing to expand the company at the expense of stockholders' value
D) Agreeing to pay bonuses based on the book value of the company stock
E) Increasing current costs in order to increase the market value of the stockholders' equity

Question

Quizplus · Accepted Answer

Agreeing to expand the company at the expense of stockholders' value creates an agency problem because it prioritizes the interests of management over the interests of shareholders. In this scenario, the financial manager may be motivated to pursue growth at all costs in order to advance their own career or gain personal benefits, even if this comes at the expense of the company's financial health or the value of shareholders' investments. This creates a conflict of interest and a misalignment of incentives between the financial manager and the shareholders they are meant to serve.

Which One of the Following Actions by a Financial Manager