Namely firms with shareholder oriented corporate governance have access to

Namely firms with shareholder oriented corporate

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Namely, firms with shareholder-oriented corporate governance have access to cheaper capital sources, providing them with a competitive advantage over firms with other corporate governance models (Fiss and Zajac 2004). In similar vein, Hansman and Kraakman (2000) showed that firms with shareholder-oriented governance enjoy competitive advantages on the market, as their corporate governance is more flexible and allows fast adaption to market changes. As these firms are not burdened with the interests of other stakeholders, they can adapt their management structures, enter the market more aggressively, and exit from inefficient investments more rapidly. Product-market competition gives a firm also an opportunity of social learning, because competition makes possible for firms to come in contact with other shareholder-oriented governance firms and to learn from them (Fiss and Zajac 2004). 55
Jensen (2001) studied the role of the corporate objective function in the corporate productivity and efficiency, social welfare and the accountability of management. Author claimed that since a firm cannot maximize more than one dimension, it needs a single objective function. However, a single objective function does not imply that only one aspect is important for a firm. On the contrary, single objective function is a complicated function of many different “goods and bads”. Two hundred years of work in the economy and finance showed that in the absence of externalities (i.e., situations in which decision maker is not entitled to all benefits and does not bear costs of his/her decisions) and monopoly (and when prices for goods are formed on the market) value maximization within a firm can lead to social welfare maximization. Social welfare is created when a firm produces outputs that are valued by its customers at more than is the value of inputs for their production. Firm value therefore equals the present value of the difference between the expected prices of inputs and outputs. As long as the firm is capable of selling its outputs at higher market price than is the cost of its inputs, it should increase the supply of inputs for production of outputs. Given that the prices of inputs and outputs are set in a manner that all gain the highest benefits (in case of absence of externalities and monopoly), profit maximization (i.e., difference between costs of inputs and prices of outputs) would lead to social welfare maximization. Stakeholder theory, on the contrary, does not offer managers a clear managerial objective, as it does not explain how managers could choose between competing interests of stakeholders. If a manager has to simultaneously maximize profits, market share, growth in profits and everything else, this will hinder his decisions and cause confusion. It is impossible to maximize more than one dimension at the same time if dimensions are not monotone transformations of one another. Furthermore, this theory can be ideal for managers who will try to follow their own (short-term) interests. As a consequence, stakeholder theory increases

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