Murphy leo odonovan sidney poitier robert am stern

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Unformatted text preview: dholders can get ripped off Delay bad Markets make news or mistakes and provide misleading can over react information FINANCIAL MARKETS Aswath Damodaran 45 TradiIonal corporate financial theory breaks down when ... 46 ¨༊  ¨༊  ¨༊  ¨༊  Managerial self- interest: The interests/objecIves of the decision makers in the firm conflict with the interests of stockholders. Unprotected debt holders: Bondholders (Lenders) are not protected against expropriaIon by stockholders. Inefficient markets: Financial markets do not operate efficiently, and stock prices do not reflect the underlying value of the firm. Large social side costs: Significant social costs can be created as a by- product of stock price maximizaIon. Aswath Damodaran 46 When tradiIonal corporate financial theory breaks down, the soluIon is: 47 ¨༊  ¨༊  ¨༊  A non- stockholder based governance system: To choose a different mechanism for corporate governance, i.e, assign the responsibility for monitoring managers to someone other than stockholders. A beCer objecIve than maximizing stock prices? To choose a different objecIve for the firm. Maximize stock prices but minimize side costs: To maximize stock price, but reduce the potenIal for conflict and breakdown: ¤༊  ¤༊  ¤༊  ¤༊  Making managers (decision makers) and employees into stockholders Protect lenders from expropriaIon By providing informaIon honestly and promptly to financial markets Minimize social costs Aswath Damodaran 47 I. An AlternaIve Corporate Governance System 48 ¨༊  Germany and Japan developed a different mechanism for corporate governance, based upon corporate cross holdings. ¤༊  ¤༊  ¤༊  ¨༊  ¨༊  In Germany, the banks form the core of this system. In Japan, it is the keiretsus Other Asian countries have modeled their system aVer Japan, with family companies forming the core of the new corporate families At their best, the most efficient firms in the group work at bringing the less efficient firms up to par. They provide a corporate welfare system that makes for a more stable corporate structure At their worst, the least efficient and poorly run firms in the group pull down the most efficient and best run firms down. The nature of the cross holdings makes its very difficult for outsiders (including investors in these firms) to figure out how well or badly the group is doing. Aswath Damodaran 48 II. Choose a D...
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