Chapter 1 Concept Questions 1, 3, 4, 6, 10
1) Who owns a corporation? Describe the process whereby the owners control the firm's management.
The stockholders essentially are the owners of the corporation. In a large corporation, the stockholders and the managers are usually separate groups. The stockholders elect the board of directors, who then select the managers. Management is charged with running the corporation's affairs in the stockholders' interests. In principle, stockholders control the corporation because they elect the directors.
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?
The relationship between stockholders and management is called an agency relationship. Such a relationship exists whenever someone (the principal) hires another (the agent) to represent his/her interests. For example, you might hire someone (an agent) to sell a car that you own while you are away at school. In all such relationships, there is a possibility of conflict of interest between the principal and the agent. Such a conflict is called an agency problem.
Suppose that you hire someone to sell your car and that you agree to pay that person a flat fee when he/she sells the car. The agent's incentive in this case is to make the sale, not necessarily to get you the best price. If you offer a commission of, say, 10 percent of the sales price instead of a flat fee, then this problem might not exist. This example illustrates that the way in which an agent is compensated is one factor that affects agency problems.
3) Evaluate the following statement: Managers 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.
If mangers focus on the short term most likely the company will fail. Although the idea is to maximize shareholder value ASAP managers...