Ch2Solns - 1 Chapter 2: Problems and Questions 1. The...

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1 Chapter 2: Problems and Questions 1. The objective of decision making in corporate finance is (e) to maximize firm value / stock prices. 2. For maximization of stock prices to be the sole objective in decision making, and to be socially desirable, the following assumption or assumptions have to hold true. (e) All of the above. 3. There is a conflict of interest between stockholders and managers. In theory, stockholders are expected to exercise control over managers through the annual meeting or the board of directors. In practice, why might these disciplinary mechanisms not work? Annual Meeting : Stockholders may not show up at annual meetings or be provided with enough information to have effective oversight over incumbent management. In addition, the corporate charter is often tilted to provide incumbent managers with the advantage, if there is a context at the annual meeting. Board of Directors : Directors are often chosen by the incumbent managers (rather than by stockholders), own few shares and lack the expertise/information to ask tough questions of incumbent managers.
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This note was uploaded on 01/29/2012 for the course ECONOMICS 3400 taught by Professor Kroger during the Spring '11 term at Georgia State University, Atlanta.

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Ch2Solns - 1 Chapter 2: Problems and Questions 1. The...

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