Question

1. What action (good or bad) might managers take when investors have already high expectations and managersdesire to outperform peers on TRS?

Answer 1

TRS is dependent on capital gains and the dividend yield of an investor.
Actions taken by managers to increase TRS and outperform peers
1. Good actions
a) Managers will try to improve operational efficiency and try to reduce operating costs and also increase revenue (by increasing sales units or increasing price)
b) Managers will opt for an optimal debt equity ratio to give higher benefits to investors
c) Dividend payouts must be optimal so that retention rates are optimal as ploughed back capital can yield higher growth of a company and higher will be the capital gain due to good performance of the company..

2. Bad actions:
a) Managers might increase the dividend payout to increase TRs for the short term but in the long run company might face stagnations it would not get capital so easily.
b) Managers might opt for faulty accounting practices by opting for varying inventory practices, depreciation method to artificially inflate earnings and increase TRS in short term.
?c) Managers might alter the timing of revenue recognition of good sold , cost of goods sold ,etc .to increase operating profit and artifiacilaly inflate earnings.

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