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Once control and ownership are separated a conflict of interest arises between the owners and the...

Once control and ownership are separated a conflict of interest arises between the owners and the people in control of a corporation.

TRUE OR FALSE??

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Answer #1

Separation of control and ownership occurs when a company becomes a public company. In that case, owners are shareholders and the company is in control of the management.

The separation causes conflict of interest as management many times put their own interest before the shareholders interests. This can be unpromising acquisitions just to increase the size of company as managements salary related to the company size. Higher salary then the peers. These are some examples of conflict of interest.

Shareholders needs to bear Agency costs to mitigate this risk.

So the answer is True i.e. separation of control and ownership causes conflict of interest.

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