Agency problem

What it means

The conflict that arises when managers act in their own interest rather than that of the owners who employ them.

The exam angle

Also runs between shareholders and bondholders — asset substitution after a leveraged deal is the classic case.

Where it appears in the syllabus

• Corporate FinanceCFA Level I · exam weight 6–9% · Governance, working capital, capital allocation, capital structure.
• Corporate FinanceCFA Level II · exam weight 5–10% · Dividends and buybacks, ESG, advanced cost of capital, restructuring.
• Foundations of Risk ManagementFRM Part I · exam weight 20% · Risk taxonomy, governance, CAPM, multifactor models, financial disasters.

Related terms

• Business riskThe uncertainty in operating income arising from the nature of the business itself, before any financing decision.
• Capital structureThe mix of debt and equity a company uses to fund itself.
• Corporate governanceThe system of controls by which a company is directed and held accountable to its stakeholders.
• Dividend policyHow a company decides to return cash to shareholders, and in what form.
• Pecking order theoryThe observation that firms prefer internal funds first, then debt, and issue equity last.
• Weighted average cost of capitalThe blended required return on a company’s capital, weighting each source by its share of the total at market value.