Question #1
Reading: Reading 16 Environmental, Social, and Governance (ESG) Considerations in Investment Analysis
PDF File: Reading 16 Environmental, Social, and Governance (ESG) Considerations in Investment Analysis.pdf
Page: 1
Status: Unattempted
Correct Answer: A
Question
Which of the following would be least likely to help control the principal-agent relationship (PAR) problem?
Answer Choices:
A. Fire employees who misbehave
B. Increase the asymmetry of information between the owners of the firm and the employees
C. Alter the behavior of executives through goal setting
Explanation
Decreasing the asymmetry of information between the owners of the firm (principals) and
executives (agents) would help to control the principal-agent relationship (PAR) problem.
The PAR problem arises from the agents (executives / employees) having more
information about the company than the principals (owners / shareholders) and misusing
that information to the advantage of the agents at the expense of the firm or principals.
The other two answer choices are methods for reducing the PAR problem by affecting the
behavior of agents by setting goals and principles of behavior and removing agents who
misbehave and violate ethics.