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© 2014 Pearson Canada Inc.#
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
Answer: D
Diff: 1 Type: MC Page Ref: 171
Skill: Recall
Objective List: 8.1 Depict how asymmetric information results in adverse selection and moral
hazard
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
Canadian 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
Answer: C
Diff: 2 Type: MC Page Ref: 171
Skill: Recall
Objective List: 8.1 Depict how asymmetric information results in adverse selection and moral
hazard
The principal-agent problem ____.
A) arises because principals have incentives to free-ride off of the monitoring expenditures of
other principals
B) arises because principals find it simple to monitor agents' activities
C) arises because agents' incentives are always compatible with those of the principals
D) arises because principals' incentives are always compatible with those of the agents
Answer: A
Diff: 2 Type: MC Page Ref: 171
Skill: Recall
Objective List: 8.1 Depict how asymmetric information results in adverse selection and moral
hazard