A small technology startup hires a new CEO to manage its operations. The company is heavily reliant on external investors who provide financial capital, while the CEO receives a fixed salary and performance-based bonuses. After receiving the capital, the CEO begins to make high-risk decisions that could lead to a significant bonus if successful but pose a risk of substantial losses to the investors.
Under Agency Theory, this situation is an example of:
Group of answer choices
Adverse selection, where investors are unable to choose the right CEO.
Moral hazard, where the CEO's risk-taking behavior is influenced by the potential for personal gain at the expense of the investors.
Agency cost, where the CEO’s salary is too high relative to the company's profits.
Moral hazard, where the CEO's risk-taking behavior is influenced by the potential for greater investor returns at the expense of his own bonus potential..