Chapter_1_Note - Chapter 1 Note Most companies are created...

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Chapter 1 Note Most companies are created by entrepreneurs who are either individuals or a small set of partners. For example, Microsoft Corp started its existence as the vision of Bill Gates; therefore it began as a privately owned business. For privately owned businesses, owners typically serve as managers, and manage the daily operation of the business. As business grows, some firms may choose t go public via an initial public offering (IPO). Many reasons contribute to the transition. One of them is the need for additional capital to expand. Regardless of the cause, the result is a company with public shares (common stocks) outstanding. The original private owners may choose to retain some shares, but do not have explicit control - they share control with new owners, who acquire company’s equity stake (common stocks) in the public marketplace. The introduction of new owners resulting from sales of equity shares to the public leads to something of significance – the possibility that firm is managed by hired professionals, not owners. Owners vote to select a board of directors as representatives of their interest, and board of directors make the decision to hire professional managers to oversee company’s operations. A. GOAL OF MANAGEMENT Note on Slide 4 There are two commonly accepted goals of management. One commonly accepted goal of financial management is to maximize owner’s wealth. Supporters of this perspective view the company as instruments of its owners. Stockholders are company’ owners; therefore, the goal is equivalent to maximizing shareholder ( stockholder) wealth, which is represented by the price of company’s stock. The other widely accepted goal is to maximize stakeholder wealth. Stakeholders are entities who are affected by the company’s action. Stakeholders includes not only stockholders, but also debt holders (who collect interest from company), employees (who receive salary and other work-related benefits), government (who collects tax), and community surrounding the company. Advocates of this perspective believe an organization serve all stakeholders, not only its owners. Shareholder Wealth Maximization ( SWM ) is widely accepted management philosophy in the Anglo-American markets. Our focus in this semester is on the US-based MNC; therefore we will adopt the SWM as the goal of corporate management. B. AGENCY PROBLEM Note on Slide 5, 6, 7 When company’s owners (principal) hire outside professionals (agents) to manage company’s operation, company’s ownership and management are separated. This raises the possibility that managers may take actions that are not in the best interest of owners. For example, agents (managers) may exploit principals (owners) to satisfy their personal
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This note was uploaded on 12/08/2011 for the course FSNA 415 taught by Professor Chengruhu during the Fall '11 term at SUNY Canton.

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Chapter_1_Note - Chapter 1 Note Most companies are created...

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