Question

which is/are true about Agency Problems?

                        I.          An indirect agency cost involves cash flowing out of the firm

                        II.        Paying salespeople on a commission is not an effective way to combat an agency problem

                        III.       The CEO of a company cannot cause an agency problem, since he is the leader of the firm

Multiple Choice

• All are True

• All are False

• Only I and II are True

• Only III is True

• Only II is True

Answer 1

Solution:

i)Indirect agency cost represent lost opportunities,hence it does not involve cash outflow

ii)Agency problem can be mitigated with the right incentives and contract design,hence paying salespeople on a commission can be a way to combat an agency problem

iii)Agency problem usually refers to a conflict of interest between a company's managment and stockholders.Mangement include CEO,hence the CEO of a company can cause an agency problem.

Accordingly,all the given statement is false.

Correct answer is 'All are false'.