Roa vs Roe and Shareholders
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Chapter 1
1. Agency Problems. Who owns a corporation? Describe the process whereby the owners control the firm’s management. What is the main reason that an agency relationship exists in the corporate form of organization? In this context, what kinds of problems can arise?
R= The owners of a corporation are the Shareholders. They control the firm’s management by controlling the corporation’s direction, policies and activities. First, they elect a Board of Directors, who then, select top management. These members of top management serve as corporate officers and manage the operations of the corporation in the best interest of the shareholders. An agency relationship exists between stockholders and management because the shareholders select the directors of the Corporation in order to represent its interests. When there is a spread ownership ( a huge number of shareholders ) there is only one management that controls the firm. This separation of control between shareholders and management causes the agency problems. In sum, agency problems exist when there is a conflict of interests between the shareholders and the management of the firm. Kind of problems that could arise are: different expectations between shareholders and management, management that acts in its own, conflicting relationships, management acting in the interest of someone else’s interests, etc.
2. Goal of the Firm. Evaluate the following statement: Manager should not focus on the current stock value because doing so will lead to an overemphasis on short-term profits at the expense of long-term profits.
R= I believe this statement is false because it depends on the goals of the firm whether or not the manager will focus on the current stock value. If the goal is to increase profits this year for example, in order to survive, the answer is yes, the manager should focus in the current stock value. The goal of maximizing profits, for
Chapter 1
1. Agency Problems. Who owns a corporation? Describe the process whereby the owners control the firm’s management. What is the main reason that an agency relationship exists in the corporate form of organization? In this context, what kinds of problems can arise?
R= The owners of a corporation are the Shareholders. They control the firm’s management by controlling the corporation’s direction, policies and activities. First, they elect a Board of Directors, who then, select top management. These members of top management serve as corporate officers and manage the operations of the corporation in the best interest of the shareholders. An agency relationship exists between stockholders and management because the shareholders select the directors of the Corporation in order to represent its interests. When there is a spread ownership ( a huge number of shareholders ) there is only one management that controls the firm. This separation of control between shareholders and management causes the agency problems. In sum, agency problems exist when there is a conflict of interests between the shareholders and the management of the firm. Kind of problems that could arise are: different expectations between shareholders and management, management that acts in its own, conflicting relationships, management acting in the interest of someone else’s interests, etc.
2. Goal of the Firm. Evaluate the following statement: Manager should not focus on the current stock value because doing so will lead to an overemphasis on short-term profits at the expense of long-term profits.
R= I believe this statement is false because it depends on the goals of the firm whether or not the manager will focus on the current stock value. If the goal is to increase profits this year for example, in order to survive, the answer is yes, the manager should focus in the current stock value. The goal of maximizing profits, for