Question

Theorize and conceptualize about goals of a firm,

    agency problems, and shareholders value maximization

Answer 1

The concept based on theories of the firm is broadly accepted micro economic linked concept started in neoclassical economics; according to the concept firms exist to maximize profits. All the activities of the Firms like interact with the market, fixation of price, demand study, resources allocation an etc are made to maximize profit. This aspect of firms create problem in modern days , as the managers or operation heads of firms might have some different concept or goal different from the goal of profit maximization .

Agency Problems :

The agency problem is very common is growing companies , where a large conflict of interest arises between operation heads and shareholders> the shareholders’ would like to maximize the wealth while managers are interested in to maximize the profit or their own wealth. Generally, managers should act as the agent for shareholders but operation heads have the best interest to maximize his own wealth.

Actions to reduce agency problem:

• Performance based incentives
• ESOP ( employee stock option)
• Close monitoring system
• Financial Advisory

Share holders value maximization :

Shareholder value maximization is simply increase in the ultimate value of the firm which is measure of success of the company in market. The concept is widely accepted as theory of running business from very long time .

The value may increase in various forms:

• Market capitalization
• Market value of share
• Brand valuation
• Intangible value
• Increase in revenue
• Net operating profit
• Reduction in cost of capital