1) Managers (________) may act in their own interest rather than in the interest of the stockholder owners (________) because the managers have less incentive to maximize profits than the stockholder owners do.
A) principals; agents
B) principals; principals
C) agents; agents
D) agents; principals
2) The principal agent problem
A) occurs when managers have more incentive to maximize profits than the stockholders owners do.
B) in financial markets helps to explain why equity is a relatively important source of finance for American business.
C) would not arise if the owners of the firm had complete information about the activities of the managers.
D) explains why direct finance is more important than indirect finance as a source of business finance.
3) The recent Enron and Tyco scandals are an example of
A) the free rider problem.
B) the adverse selection problem.
C) the principal agent problem.
D) the “lemons problem.”