The agency conflict that arises because some firms have outside owners (stockholders) and inside owners (stockholders) can lead to the incentive for ___________ which then results in agency costs because ___________ will demand a higher rate of return (lower stock price).

Outside owners to increase the risk of the firm; inside owners

Inside owners to increase the risk of the firm; outside owners

Inside owners to use the firms resources for personal benefit; outside owners

Outside owners to use the firms resources for personal benefit; inside owners

Question 8

Which of the following two statements is correct?

S1: Ideally, the objective of managers is to maximize shareholder value. However, often managers act in their own self interest which results in an agency conflict with debtholders.

S2: Managers acting in their own self interest can result in making risky corporate investments to cover up past mistakes or to make up for less profitable projects in the past.

S1 is correct but S2 if false

S2 is correct but S1 is false

Both statements are false

Both statements are correct

Question 101 pts

Which of the following two statements is correct?

S1: The threat of removal of managers through the board of directors or large shareholders (activist shareholders) is a primary deterrent against managers acting in their own self interest.

S2: The threat of a hostile takeover of the firm is a primary deterrent against managers acting in their own self interest.

S2 is correct but S1 is false

Both statements are correct

S1 is correct but S2 if false

Both statements are false