Combination of a range of key financial indicators

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combination of a range of key financial indicators, KFIs, such as leverage ratio, liquidity ratio and the retention ratio: fundamentally, management is secure if the firms carries minimal debt, delay dividends in time period t in favour of R&D in time period t+1 and engages in positive learning transfer to reassure investors. Agency costs There is a benchmark rule in Framework T3: the higher the valuation of a company the less likely is the threat of takeover. This rule, however, intimates that dividends should stay high to maintain the share price. Alternatively management may wish to invest more profits to secure more growth with a risk that the value of the company falls. If the higher valuation were perceived by shareholders to be at a maximum then shareholders would prefer that higher valuation, so it behoves management to persuade shareholders that the risk of Signalling, Strategy & Management Type 33
a fall in value can be captured by a higher growth rate. Management inability to persuade shareholders gives rise to agency costs 6 . One way to tackle the agency costs is for management to design a trust mechanism between shareholder and management, and thus enabling shareholders to entrust money to management with a reasonable expectation of getting something back. Marris type PLT A central theme is designing trust is the context of the management decision, that is, how the decision is observed by shareholders. Shareholders may adopt a Bayesian-type rule, seeing what they want to see about management and the firm. Management should resist this. How? They could signal a positive learning transfer to shareholders whereby management with prior experience (in games with) value-growth issues introduce positive expectations of a stronger performance (higher value for the firm). This could be achieved through persuading shareholders to view the decision as a continuum rather than as a dichotomy. In other words, the decision has to be framed as a decision about more growth and higher value and not about less value and more growth. Shareholders can then observe the decision of management as a chance wherein making a gain in circumstances where they trust management outweighs the risk of making a loss. In terms of the competition, management should evolve as strategic players in the sense that they understand that their actions are likely to lead to a reaction from competitors. In other words they become conscious of the fact that the price of their product depends on the decisions of their competitors, affecting both capacity and market reach of the product. For some products the combination of overcapacity and technology standardisation will drive prices down creating low profit margins. In these circumstances, management as a player engage in patching by re-mapping portions of the product’s business to changing market opportunities.

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