You and a friend visit the headquarters of a company and are awestruck by the expensive artwork and designer furniture that grace every office. your friend is very impressed and encourages you to consider buying stock in the company, arguing that it must be really successful to afford such elegant surroundings.

Find out whether ownership and management are separate.

Principal-agent problem.

Explanation:

The lavish environment may result from the issue of the principal agent, where managers who do not own the corporation they run have different goals than the investors.

One must find out whether there is a distinction among management and ownership, or whether, if there is proof of the management's pattern of extravagant and wasteful spending.

When there is proof of a clear disconnection among management goals and investors ' best interests, buying shares in this corporation might not be the best option.

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