A small number of institutional investors are often able and motivated to bring direct shareholder pressure on a firm's management in an effort to reduce potential agency conflicts.

a. True

b. False:

TRUE

Explanation:

Agency theory is a principle that is used to explain and resolve issues in the relationship between business principals and their agents. Most commonly, that relationship is the one between shareholders, as principals, and company executives, as agents.

Agency theory assumes that the interests of a principal and an agent are not always in alignment which causes dispute (since the agent is the decision maker but incurs little or no risk because any loss will be borne by the principal). The disputes arises from either difference in goal or difference in risk aversion. This is called the principal-agent problem or conflict.

In an effort to reduce or overcome this conflict, incentives may be used to redirect the behaviour of the agent to realign the interests with the principal's concerns.

Therefore, IT IS TRUE that a small number of investors are often able and motivated to bring direct shareholder pressure on a firm's management in an effort to reduce potential agency conflicts.