Question

① Would our goal of maximizing the value of the stock be different if we were thinking about financial management in a foreign country?

　　Why or why not?

② Suppose you own stock in a company. The current price per share is $25. Another company has just announced that it wants to buy your company and pay $35 per share to acquire all the outstanding stock. Your company’s management immediately begins fighting off this hostile bid.

　　Is management acting in the shareholders’ best interests? Why or why not?

③ Corporate ownership varies around the world. Historically individuals have owned the majority of shares in public corporations in the United States. In Germany and Japan, however, banks, other large financial institutions, and other companies own most of the stock in public corporations.

　　　Do you think agency problems are likely to be more or less severe in Germany and Japan than in the United States? Why?

　Over the last few decades, large financial institutions such as mutual funds and pension funds have been becoming the dominant owners of stock in the United States, and these institutions are becoming more active in corporate affairs.

　What are the implications of this trend for agency problems and corporate control?

④ Critics have changed that compensation to top managers in the United States is simply too high and should be cut back. For example, focusing on large corporations, Robert Kotick, CEO of Activision Blizzard, earned about $64.9 million in 2013.

　Are such amounts excessive?

In answering, it might be helpful to recognize that superstar athletes such as LeBron James, top entertainers such as Tom Hanks and Oprah Winfrey, and many others at the top of their respective fields earn at least as much, if not a great deal more.

Answer 1

1) No, the goal of maximisation of shareholders wealth is a universal goal of any corporation whether operating in home country or foreign country. If a company performs well in a competitive environment and has to robust business model, its value of the stock would rise automatically. So, it does not matter whether we are considering its domestic operations or overseas operations. Strong revenue generation and sound cash flow position would eventually convert into an uptrend in the stock price.

2)Yes, the management is right in fending off the hostile bid attempt by a rival company and is acting in the best interests of shareholders. The prevailing market price per share of the company is $25 whereas the competitor firm is offering to buy all outstanding stock of the company at $35 per share which is a remarkably premium price. But the company's existing shareholders would lose their stake and control in the company which is a growing firm with good future prospects as is evident from the price quoted by the rival firm. So, it is in the interest of the shareholders into the long run not to surrender their rights over the management of the company.

3)As in Germany and Japan, major banks, large financial institutions and other companies own major portion in the public corporations, agency problems are likely to be more severe in these countries as compared to U.S. where majority of shares in public corporations are owned by individual retail investors. But since large financial institutions like mutual funds and pension funds are becoming prominent shareholders in public corporations in U.S. of late, agency problems are likely to crop up. These institutions are gaining more control and say in the management of corporations and are becoming more active in corporate affairs.

4) Excessively high remuneration given to the top management officials of some large corporations in U.S. is not a good business practice and such huge compensation packages should be adequately curtailed. These remuneration figures are a product of performance- linked incentives offered to these officials. So, in order to justify their business performance, companies many a times window dress or present a false rosy picture of their business model and turn a blind eye towards the core fundamentals of the company thereby adversely affecting their future business prospects and destroying shareholders wealth. And if we talk about the money earned by some top celebrities in their respective fields, it would be advisable not to compare apples with oranges since a corporate matter is a different ballgame altogether because the CEOs of big corporations not just endorse the brands like celebrities but stand as a representative of the company and vouch for its operations and profitability.