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C H A P T E R 1Multinational Financial Management: An OverviewSpring 2019
Chapter ObjectivesTo identify the main goal of the multinational corporation (MNC) and organizational structure of the MNC (WHO);To describe the key theories that justify international business (WHY);To explain the common methods used to conduct international business (HOW), and; Valuation Model for the MNC.4/8/192Ch 1 - Multinational Financial Management: An Overview
1. Managing the MNC4/8/193Ch 1 - Multinational Financial Management: An Overview
1. Managing the MNCThe commonly accepted goal of an MNC is to maximize shareholder wealth.We will focus on MNCs that wholly own their foreign subsidiaries (i.e., the US parent is the sole owner of the subsidiaries).4/8/194Ch 1 - Multinational Financial Management: An Overview
Conflicts in the MNC Goal4/8/19Ch 1 - Multinational Financial Management: An Overview5For corporations with shareholders who differ from their managers, a conflict of goals can exist - the agency problem.Agency costs are normally larger for MNCs than for purely domestic firms.The scattering of distant subsidiaries (centralized versus decentralized management style).The culture of foreign managers.The size of the MNC.Subsidiary value versus overall MNC value.
Control of Agency Problem4/8/19Ch 1 - Multinational Financial Management: An Overview6Parent control of agency problemsSubsidiary value versus overall MNC value.Oversee the subsidiary decisionsImplement compensation plans linked to the parent MNC’s stock to subsidiary managers Corporate control of agency problems Various forms of corporate control can reduce agency costs.Stock compensation for board members and executives.The threat of a hostile takeover.Monitoring and intervention by large shareholders.•Sarbanes-Oxley Act(SOX)oEnsures a more transparent process for managers to report on the productivity and financial condition of their firm.
SOX Methods to Improve Reporting4/8/19Ch 1 - Multinational Financial Management: An Overview7●Establishing a centralized database of information●Ensuring that all data are reported consistently among subsidiaries●Implementing a system that automatically checks for unusual discrepancies relative to norms●Speeding the process by which all departments and subsidiaries have access to all the data they need●Making executives more accountable for financial statements
Constraints in the MNC’s Goal4/8/19Ch 1 - Multinational Financial Management: An Overview8Recent studies show that investors assigned a higher value to firms that:exhibit high corporate governance standards are likely to obey ethical constraints.
Constraints in the MNC’s Goal4/8/19Ch 1 - Multinational Financial Management: An Overview9Environmentalconstraints: antipollution laws (European countries), Building codes, disposal of production waste materials, etc.