A corporation whose managers are separate from its owners will face zero agency costs when it uses stock options as part of its compensation package for upper managers True False
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Stock options are the type of employee compensation that gives the recipient the right to buy a number of shares of the company's stock at a specific exercise price. it's a right of the employee and not an obligation.
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- Which of the following statements is FALSE? By tying compensation to performance, shareholders aim to prevent/reduce agency problems. Increasing the pay-for-performance sensitivity comes with the added benefit of reducing manager's risk. During the 1990s, most companies adopted compensation policies that more directly gave managers an ownership stake by including grants of stock or stock options to executives. Stock and option grants give managers an incentive to increase the stock price to make their stock or options as valuable as possible.Which of the following is not likely to be included in thetypical components of management compensation?a. Company stock options.b. Cash bonuses.c. Free meals.d. Fixed salary.e. Company stock.Which of the following methods would be most likely to decrease the agency problems by helping motivate managers to act in the best interests of shareholders? 1. Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries. 2. Eliminate a requirement that members of the board of directors have a substantial investment in the firm's stock. 3. Decrease the use of restrictive covenants in bond agreements. 4. Take actions that reduce the possibility of a hostile takeover. 5. Elect a board of directors that allows managers greater freedom of action.
- which of the following could be a potential solution to the agency problem between managers and shareholders? 1. having the managers meet more often 2. having fewer managers 3. paying the managers higher cash wages 4. having more female managers than the males managers 5. giving the managers a part of the company through stock-based compensationWhich of the following statements is CORRECT? Select one: a. Conflict of interest between shareholders and managers is not possible. b. By definition, the agency problem can only take place in corporations but not in proprietorships and partnerships. c. Conflict of interest between shareholders and bondholders is not possible. d. Managers always work to maximize the long-run value, and therefore the price, of their company stocks. This is exactly what shareholders desire.Agency conflicts between managers and shareholders Remember, an agency relationship can degenerate into an agency conflict when an agent acts in a manner that is not in the best interest of his or her principal. In large corporations, these conflicts most frequently involve the enrichment of the firm’s executives or managers (in the form of money and perquisites or power and prestige) at the expense of the company’s shareholders. This usurping and reallocation of shareholder wealth is most likely to occur when shareholders do not have sufficient information about the decisions and actions being made by the firm’s management. Consider the following scenario and determine whether an agency conflict exists: Michael and Primalia equally own and manage A New Beginning (ANB), a store that sells preowned clothing and furniture. Michael is responsible for ANB’s back-office activities, and Primalia staffs the store and makes deliveries to customers. Both have equal decision-making…
- 6. Which of the following statements about the agency costs of equity is false? Agency costs of equity are greater if managers have small levels of shareholdings in the firm Agency costs of equity may be reduced through executive compensation packages Agency costs of equity are greater if managers have greater incentive to increase their non-monetary benefits All of the above None of the aboveThe Principal-Agent Problem arises A) because managers have little incentive to work in the interest of shareholders when this means working against their own self-interest. B) because of the separation of ownership and control in a corporation. C) Both A and B D) None of the aboveWhat is one of the ways that accounting is used to direct and control the manager of a corporation? a.Threatening to tell shareholders a mangers income if a manager makes a ‘poor financial’ decision. b.Linking of a mangers performance to a bonus that depends on accounting profit. c.Making decisions based on the accounting information regardless of managerial input. d.Using income smoothing to assure a manager that they can invest in a low risk investment.
- A director’s duty to avoid a conflict of interest includes:Select one:a. Not making a personal profit from an opportunity arising from their officeb. Not taking up an opportunity that belongs to the companyc. Not using his or her position for private gaind. All of the aboveExplain the links between stock price, intrinsic value, and executive compensation Discuss the importance of business ethics and the consequences of unethical behavior.Agency cost arise from the senior management's inability to control shareholder true or False. State
