- CFA Exams
- CFA Level I Exam
- Topic 3. Corporate Issuers
- Learning Module 3. Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits
- Subject 1. Shareholder Conflicts and Management
CFA Practice Question
Which of the following statements about principal-agency relationships is most likely accurate?
A. Shareholders and creditors tend to have similar risk tolerance with respect to the investments that a company should undertake.
B. In a principal-agent relationship one entity, the agent, appoints another entity, the principal, to act on its behalf.
C. Managers typically have greater access to information about the company's affairs than the shareholders.
Explanation: Shareholders and creditors tend to have different risk tolerance with respect to the investments that a company should undertake. The interest of creditors is to have a company undertake activities that promote stable financial performance. Shareholders, on their part, prefer to have the company undertake riskier activities that have high return potential.
In a principal-agent relationship one entity, the principal, appoints another entity, the agent, to act on its behalf.
User Contributed Comments 0
You need to log in first to add your comment.