which of the following actions would most likely to reduce potential conflicts of interest between stockholders...

which of the following actions would most likely to reduce potential conflicts of interest between stockholders and managers?

A. make the bond covenants more restrictive

B. pay managers cash salaries and give them no stock options

C.make it more difficult for the board of directors to fire corporate managers

D. promise managers that they will receive a generous compensation packages if the corporation is taken over by another firm

E.None of the answers are correct

Solutions

Expert Solution

Basically, stockholders are scattered and can not always participate in the day to day workings of the company. This creates the agency problem where, the managers might prefer maximizing short term profits and take up riskier projects at the cost of causing a loss to the shareholders. The problem can be done away with or reduced by tying up managers' goals to increases shareholder's wealth. With this understanding let's look at the options:

A. Bond covenants safeguard the interests of the bondholders and that might have a byproduct effect of safeguarding stockholder's interest but that is not always true.

B. In fact, paying the stock options make them more thoughtful about safeguarding the stockholder's interest than the other way round as suggested by this option

C.If the managers are not afraid of getting fired, they may take riskier decisions compromizing the interests of the stockholders.

D. Take over of the firm may or may not be in the best interest of the stockholders and therefore this options dosn't give a conclusive answer

E.As none of the above options is safeguarding the interests of the stockholders, thereby reducing the potential conflict between them and the managers, this is the correct option

jeff jeffy answered 2 years ago

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