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Aswath damodaran 59 is there a payo to becer corporate

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Unformatted text preview: ifferent ObjecIve FuncIon 49 ¨༊  Firms can always focus on a different objecIve funcIon. Examples would include maximizing earnings ¤༊  maximizing revenues ¤༊  maximizing firm size ¤༊  maximizing market share ¤༊  maximizing EVA ¤༊  ¨༊  The key thing to remember is that these are intermediate objecIve funcIons. To the degree that they are correlated with the long term health and value of the company, they work well. ¤༊  To the degree that they do not, the firm can end up with a disaster ¤༊  Aswath Damodaran 49 III. Maximize Stock Price, subject to .. 50 ¨༊  ¨༊  The strength of the stock price maximizaIon objecIve funcIon is its internal self correcIon mechanism. Excesses on any of the linkages lead, if unregulated, to counter acIons which reduce or eliminate these excesses In the context of our discussion, ¤༊  ¤༊  ¤༊  ¤༊  managers taking advantage of stockholders has led to a much more acIve market for corporate control. stockholders taking advantage of bondholders has led to bondholders protecIng themselves at the Ime of the issue. firms revealing incorrect or delayed informaIon to markets has led to markets becoming more “skepIcal” and “puniIve” firms creaIng social costs has led to more regulaIons, as well as investor and customer backlashes. Aswath Damodaran 50 The Stockholder Backlash 51 ¨༊  ¨༊  ¨༊  AcIvist InsItuIonal investors have become much more acIve in monitoring companies that they invest in and demanding changes in the way in which business is done. They have been joined by private equity funds like KKR and Blackstone. AcIvist individuals like Carl Icahn specialize in taking large posiIons in companies which they feel need to change their ways (Blockbuster, Time Warner, Motorola & Apple) and push for change. Vocal stockholders, armed with more informaIon and new powers: At annual meeIngs, stockholders have taken to expressing their displeasure with incumbent management by voIng against their compensaIon contracts or their board of directors Aswath Damodaran 51 The HosIle AcquisiIon Threat 52 ¨༊  The typical target firm in a hosIle takeover has ¤༊  a return on equity almost 5% lower than its peer group ¤༊  had a stock that has significantly under performed the peer group over the previous 2 years ¤༊  has managers wh...
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