Be traced to rm markets are efcient and assess effect

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Unformatted text preview: performance provides some very elegant theory on: AllocaIng resources across scarce uses (which investments to take and which ones to reject) ¤༊  how to finance these investments ¤༊  how much to pay in dividends ¤༊  Aswath Damodaran 5 The Classical ObjecIve FuncIon 6 STOCKHOLDERS Hire & fire managers - Board - Annual Meeting Lend Money BONDHOLDERS/ LENDERS Maximize stockholder wealth Managers Protect bondholder Interests Reveal information honestly and on time No Social Costs SOCIETY All costs can be traced to firm Markets are efficient and assess effect on value FINANCIAL MARKETS Aswath Damodaran 6 What can go wrong? 7 STOCKHOLDERS Have little control over managers Lend Money BONDHOLDERS Managers put their interests above stockholders Managers Bondholders can get ripped off Delay bad news or provide misleading information Significant Social Costs SOCIETY Some costs cannot be traced to firm Markets make mistakes and can over react FINANCIAL MARKETS Aswath Damodaran 7 I. Stockholder Interests vs. Management Interests 8 ¨༊  In theory: The stockholders have significant control over management. The two mechanisms for disciplining management are the annual meeIng and the board of directors. Specifically, we assume that Stockholders who are dissaIsfied with managers can not only express their disapproval at the annual meeIng, but can use their voIng power at the meeIng to keep managers in check. ¤༊  The board of directors plays its true role of represenIng stockholders and acIng as a check on management. ¤༊  ¨༊  In PracIce: Neither mechanism is as effecIve in disciplining management as theory posits. Aswath Damodaran 8 The Annual MeeIng as a disciplinary venue 9 ¨༊  The power of stockholders to act at annual meeIngs is diluted by three factors Most small stockholders do not go to meeIngs because the cost of going to the meeIng exceeds the value of their holdings. ¤༊  Incumbent management starts off with a clear advantage when it comes to the exercise of proxies. Proxies that are not voted becomes votes for incumbent management. ¤༊  For large stockholders, the path of least resistance, when confronted by managers that they do not like, is to vote with their feet. ¤༊  ¨༊  Annual meeIngs are also Ightly scripted and controlled events, making it difficult for outsiders and rebels to bring...
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