Chapter4 - MANAGERIAL ECONOMICS An Analysis of Business...

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1 MANAGERIAL ECONOMICS An Analysis of Business Issues Howard Davies and Pun-Lee Lam Published by FT Prentice Hall
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2 Chapter 4: Ownership and Control, Diversification and Mergers Objectives: After studying the chapter, you should understand: 1. the advantages and disadvantages of the separation of ownership from control 2. the agency problem and possible checks on management 3. the various reasons for mergers and takeovers
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3 The Questions to Answer to what extent do firms seek maximum profit when ownership and control are in the hands of different people? what factors determine the extent to which a firm diversifies across different industries? how and why do mergers and take-overs take place?
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4 Family control of firms in Hong Kong Advantages 1. 2. 3. Disadvantages 1. 2. 3. In Hong Kong, large companies are controlled by leading families. What are the advantages and disadvantages of this family control of firms?
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5 Do Firms Really Try to Maximise Profits? The profit-maximizing model assumes that there is no separation of ownership from control i.e. Owners = Managers But we have often have a separation in the modern corporation.
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6 Separation of Ownership from Control Benefits : Division of labor, capital requirement, reduction of financing costs. Problems : Control loss, divergent interests, higher monitoring costs.
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7 To What Extent Do Firms Seek Maximum Profit When Ownership and Control Are in the Hands of Different People? TWO QUESTIONS HERE 1. Do shareholders always seek maximum profit? 2. If shareholders do seek maximum profit, do senior managers behave in ways which are consistent with shareholder interest or do they have significant discretion? Links between ownership and control Concentration of ownership and the influence of institutional investors The market for corporate control
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8 Do shareholders always seek maximum profit? If they buy from or sell to the firm they may prefer lower prices for outputs or higher prices for inputs If the firm can affect prices in any way, shareholders may prefer less profit BUT it is mostly reasonable to assume that shareholders prefer more profit
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9 Do senior managers behave in ways which are consistent with shareholder interest or do they have significant discretion? Links between ownership and control Concentration of ownership and the influence of institutional investors The market for corporate control Managerial labour markets
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10 Links between ownership and control Berle and Means (1932, 1967) defined “management controlled” firms as those where no single shareholder has more than 20% 58% of the assets of US top 200 firms were management controlled in 1929, 85% in 1966. But
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This note was uploaded on 08/07/2011 for the course PMBA 2963.2 taught by Professor Stephenchiu during the Spring '03 term at HKU.

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Chapter4 - MANAGERIAL ECONOMICS An Analysis of Business...

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