the objective of corporate finance and corpora.PPTVIP

The Objective of Corporate Finance and Corporate Governance 04/03/08 Ch.2 Why do we need an objective? An objective specifies what a decision maker is trying to accomplish and by so doing, provides measures that can be used to choose between alternatives. Why do we need a unique objective? Allows for systematic decision making A theory developed around multiple objectives of equal weight will create quandaries when it comes to making decisions. Characteristics of a good objective function It is clear and unambiguous It comes with a clear and timely measure that can be used to evaluate the success or failure of decisions. It does not create costs for other entities or groups that erase firm-specific benefits and leave society worse off overall. In theory, what serves as a good objective for us? When the stock is traded and markets are viewed to be efficient, the objective is to maximize the stock price (and firm value). Why? It is easily observable constantly updated If investors are rational, it reflects the wisdom of decisions, short term and long term, instantaneously. It is a real measure of stockholder wealth, since stockholders can sell their stock and receive the price now. The classical objective function We don’t live in a Utopian world Agency costs refer to the conflict of interest that arise between the different parties and thus make parties act in a manner that is inconsistent with stock price maximization. I. Stockholder vs. Management Practice Most small stockholders do not attend meetings Incumbent management starts off with a clear advantage when it comes to the exercising of proxies. For large stockholders, sometimes, when confronted by managers that they do not like, is to vote with their feet. The problem with the board of directors The board of directors is the body that oversees the management of a publicly traded firm. The board of directors are supposed to represent the shareholders and disciplin