Asked by MIRTEMUR SHAKIROV on Jul 23, 2024
Verified
In an owner-manager agency relationship the problem of risk aversion arises because:
A) shareholders prefer the managers to take fewer risks in order to maximise the returns on their investment.
B) managers prefer to make decisions that are less risky for the entity as they have more to lose than the shareholders.
C) managers have less capital invested in the entity than shareholders.
D) shareholders generally have no other sources of income.
Risk Aversion
The reluctance or avoidance of undertaking investment with uncertain outcomes, preferring outcomes that are more predictable.
Owner-Manager
An individual who both owns a significant part of a company and is actively involved in its management.
Agency Relationship
A situation where one party, known as the agent, is authorized to act on behalf of another, called the principal, in dealing with third parties.
- Understand the essentials of agency theory and the owner-manager relationship, including risk aversion and other agency problems.
Verified Answer
BP
Bindi PatelJul 24, 2024
Final Answer :
B
Explanation :
In an owner-manager agency relationship, the managers may be risk-averse because they have more to lose than the shareholders if the entity fails. Shareholders, on the other hand, may prefer managers to take on more risk in order to maximize returns on their investment. Therefore, choice B is the most accurate description.
Learning Objectives
- Understand the essentials of agency theory and the owner-manager relationship, including risk aversion and other agency problems.