Which of the following statements about agency theory is TRUE?
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A. B. C. D.B
An agency relationship is created when decision-making authority is delegated to an agent without the agent being 100% responsible for the consequences of her decisions. Here, unless the Chief Financial Officer owns 100% of the firm, she has an agency relationship with the company.
Stockholders and managers both benefit from risky projects that increase profitability and firm value. However, bondholders bear the risk of bankruptcy. Thus, encouraging managers to take on high-risk projects does not help to align their goals with that of creditors. A company that pays fixed salaries with no variable compensation schemes is not set up to reduce agency conflict. Without managerial compensation plans that motivate managers to act to increase stock price, stockholders and managers may have disparate goals.