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Unformatted text preview: specially derivaIves) Aswath Damodaran 41 IV. Firms and Society 42 ¨༊  ¨༊  In theory: All costs and benefits associated with a firm’s decisions can be traced back to the firm. In pracIce: Financial decisions can create social costs and benefits. A social cost or benefit is a cost or benefit that accrues to society as a whole and not to the firm making the decision. n༆  Environmental costs (polluIon, health costs, etc..) n༆  Quality of Life' costs (traffic, housing, safety, etc.) ¤༊  Examples of social benefits include: n༆  creaIng employment in areas with high unemployment n༆  supporIng development in inner ciIes n༆  creaIng access to goods in areas where such access does not exist ¤༊  Aswath Damodaran 42 Social Costs and Benefits are difficult to quanIfy because .. 43 ¨༊  ¨༊  ¨༊  Cannot know the unknown: They might not be known at the Ime of the decision. In other words, a firm may think that it is delivering a product that enhances society, at the Ime it delivers the product but discover aVerwards that there are very large costs. (Asbestos was a wonderful product, when it was devised, light and easy to work with… It is only aVer decades that the health consequences came to light) Eyes of the beholder: They are ‘person- specific’, since different decision makers can look at the same social cost and weight them very differently. Decision paralysis: They can be paralyzing if carried to extremes. Aswath Damodaran 43 A test of your social consciousness: Put your money where you mouth is… 44 ¨༊  ¨༊  Assume that you work for Disney and that you have an opportunity to open a store in an inner- city neighborhood. The store is expected to lose about a million dollars a year, but it will create much- needed employment in the area, and may help revitalize it. Would you open the store? ¤༊  ¤༊  ¨༊  If yes, would you tell your stockholders and let them vote on the issue? ¤༊  ¤༊  ¨༊  Yes No Yes No If no, how would you respond to a stockholder query on why you were not living up to your social responsibiliIes? Aswath Damodaran 44 So this is what can go wrong... 45 STOCKHOLDERS Have little control over managers Lend Money BONDHOLDERS Managers put their interests above stockholders Managers Significant Social Costs SOCIETY Some costs cannot be traced to firm Bon...
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