Question

Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and managers?

Answer 1

What could reduce potential conflicts of interest is the use of covenants in bond agreements that limit the firm's use of additional debt and constrain managers actions

Let understand that Shareholders are basically the “owners” of the company and they are entitled to dividend payments and stock price appreciation because they bought shares.

Let understand that Managers are the people or officers who manage the company (& shares) on a daily basis.

• Now, there can be conflicts of interest between stockholders and managers because of disagreement on what should be and not.

• The major actions that can help to reduce this conflict are covenants in bond agreements. By reason of this, the manager of limited on what to do with the funds of the shareholders and can be penalized if found defaulted by law.

Learn more about covenants in bond agreements

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