Question

What are the management-entrenchment and the shareholders'-interests hypotheses? Which seems more realistic in your judgment? Explain your answer.

Answer 1

In the words of noted finance professor and author Michael Weisbach : " Management entrenchment occurs when managers gain so much power that they are able to use the firm to further their own interests rather than interests of shareholders" .  

Shareholders Interest Hypothesis which is also called convergence of interest hypothesis that implies that the shareholders wealth will increase when the management will take the decisions and actions to prevent the changes in control.  

Shareholders interests hypotheses is more realistic and better as compared to the management entrenchment.  

The management entrenchment can affect the opinions of the managers and shareholders. The workplace will be suffered more and personal biasness may be undertaken by managers.  

According to experts the management may turn into blind eye to unethicaor illegal business brhaviour by management entrenchment.  

The management entrenchment will decline shareholders value while the shareholders interest hypothesis will increase it.