Agency Theory Quiz

What does agency theory primarily explain?

• The relationship between employees and employers

• The relationship between principals and agents

• The relationship between shareholders and customers

• The relationship between management and clients

What motivates both principals and agents according to agency theory?

• Altruism

• Loyalty

• Self-interest

• Teamwork

What is a potential conflict in the relationship between shareholders and management?

• Management always maximizes shareholder value

• Management may pursue personal growth over shareholder profit

• Shareholders have complete control over management decisions

• Management is not accountable to shareholders

In the context of agency theory, who are considered the principals?

• Managers

• Shareholders

• Employees

• Clients

What is one example of agency problems mentioned in the text?

• Clients making all investment decisions

• Shareholders always being informed about decisions

• Managers expanding the company for personal reputation

• Employees working harder when unsupervised

What is meant by information asymmetry in agency theory?

• Both parties have equal information

• Agents know more about day-to-day operations than principals

• Principals know more than agents

• Information is shared equally

What is one solution to agency problems mentioned in the text?

• Incentives linked to principals' goals

• Complete independence of agents

• Lack of monitoring

• No contracts

What might motivate a financial advisor to recommend certain investments?

• Long-term client relationships

• The best interest of the client

• Higher fees for themselves

• Market trends

What is a potential issue with politicians acting as agents?

• They may engage in self-interest and corruption

• They always act in the best interest of citizens

• They are monitored closely by citizens

• They have no power over citizens

What is one way principals can monitor agents?

• By ignoring their actions

• Through regular evaluations and audits

• By allowing complete autonomy

• By increasing their workload