Which of the following is not an example of a problem explained by agency theory?
a) a manager encounters a conflict of interest between their responsibilities to shareholders and their responsibilities to employees.
b)a manager protects her own job rather than the shareholder's wealth.
c) a manager takes few risks to ensure steady dividends
d) a manager fires underperforming employees
I am thinking it might be d
I agree.
https://www.investopedia.com/terms/a/agencytheory.asp
Thank you, Ms. Sue!
You're welcome.
To identify which of the options is not an example of a problem explained by agency theory, we first need to understand what agency theory is. Agency theory examines the relationship between principals (shareholders) and agents (managers or employees) and the conflicts of interest that may arise between them.
Let's analyze each option to determine if it fits the characteristics of agency theory:
a) A manager encountering a conflict of interest between their responsibilities to shareholders and their responsibilities to employees is a classic example of a principal-agent conflict and is consistent with agency theory.
b) A manager protecting her own job rather than the shareholders' wealth is another example of a principal-agent conflict. This conflict arises when the agent prioritizes their own interests over the interest of the principal, which aligns with agency theory.
c) A manager taking few risks to ensure steady dividends relates to the principal-agent conflict regarding risk preferences. Here, the manager may choose a conservative approach to minimize the potential loss for shareholders, but it may hinder potential gains. This scenario aligns with the principles of agency theory.
d) A manager firing underperforming employees does not directly relate to the principal-agent conflict explained by agency theory. While this situation involves managerial decision-making, it primarily concerns the performance management and human resources aspect of an organization, rather than conflicts between shareholders and managers.
Based on the analysis, option d) "a manager fires underperforming employees" is the option that is not an example of a problem explained by agency theory.