But this happens infrequently senior management has

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Unformatted text preview: 2. Direct Effects and Strategic Effects of Organizational Decisions 1. Games with Strategic Substitutes/Strategic Complements • Big Picture M&S 452 — Strat and Org c 2008 Scott Schaefer 30 “By issuing debt in exchange for stock, companies bond their managers’ promise to pay out future cash flows in a way that simple dividend increases do not.” “A central weakness and source of waste in the public corporation is the conflict between shareholders and managers over the payout of free cash flow — that is, cash flow in excess of that required to fund all investment projects with positive net present values when discounted at the relevant cost of capital. For a company to operate efficiently and maximize value, free cash flow must be distributed to shareholders rather than retained. But this happens infrequently; senior management has few incentives to distribute the funds, an...
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