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The principal-agent problem arises from the delegation of control from the shareholders to the ceo under asymmetric information
The principal-agent problem arises from the delegation of control from the shareholders to the ceo under asymmetric information. In which type of business would you expect this type of problem to be worse?
A profitable business
B complex business
C competitive business
D counter cyclical business
E high beta business
Expert Solution
A Profitable Business
The principal-agent problem is a conflict in priorities between a person or group and the representative authorized to act on their behalf. An agent may act in a way that is contrary to the best interests of the principal. A company's shareholders, as part-owners, are principals who rely on the company's chief executive officer (CEO), as their agent, to carry out a strategy in their best interests. That is, they want the stock to increase in price or pay a dividend, or both. If the CEO opts instead to plow all the profits into expansion or pay big bonuses to managers, the principals may feel they have been let down by their agent.
Shareholders are more concerned with profits and thus the principal-agent problem arises from the delegation of control from the shareholders to the CEO under asymmetric information will be worse in case of profitable business.
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