Because of the limited diversification potential of human capital, managers have
ID: 2714089 • Letter: B
Question
Because of the limited diversification potential of human capital, managers have an incentive to seek:
A. Higher risk projects because they offer the potential for higher returns (payoffs) for the managers
B. Higher return projects because they are less risky
C. Lower risk projects, becaue these projects are in the best interest of all stakeholders
D. Lower risk projects, because these projects are in the best interest of stockholders
E. Lower risk projects, because these projects reduce the probablilty of the firm going bankrupt
Explanation / Answer
A. Higher risk projects because they offer the potential for higher returns (payoffs) for the managers.
When these projects are successful , the payoff is huge as they are riskier. This helps managers to get big bonuses. If the project is unsuccessful it is the shareholders who pay( with decrease in stock price).