The wealth maximizing actions of financial managers

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Unformatted text preview: n profit maximization, is the firm’s goal and how the agency issue is related to it. The goal of the financial manager is to maximize the owners’ wealth, as evidenced by stock price. Profit maximization ignores the timing of returns, does not directly consider cash flows, and ignores risk, so it is an inappropriate goal. Both return and risk must be assessed by the financial manager who is evaluating decision alternatives. The wealth-maximizing actions of financial managers should also reflect the interests of stakeholders, groups who have a direct economic link to the firm. Positive ethical practices help the firm and its managers to achieve the firm’s goal of owner wealth maximization. An agency problem results when managers, as agents for owners, place personal goals ahead of corporate goals. Market forces, in the firm of shareholder activism and the threat of takeover, tend to prevent or minimize agency problems. Firms incur agency costs to monitor managers’ actions and provide incentives for them to act in the best interests of owners. Stock options and performance plans are examples of such agency costs. Understand the relationship between financial institutions and markets, and the role and operations of the money and capital markets. Financial institutions serve as intermediaries by channeling into loans or investments the savings of individuals, businesses, and governments. The financial markets are forums in which suppliers and demanders of funds can transact business directly. Financial institutions actively participate in the financial markets as both suppliers and demanders of funds. In the money market, marketable securities (short-term debt instruments) are traded, typically through large New York banks and government securities dealers. The Eurocurrency market is the international equivalent of the domestic money market. In the capital market, transactions in long-term debt (bonds) and equity (common and preferred stock) are made. The organized securities exchanges provide secondary markets for securi...
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