Comparative Corporate Governance and Financial Goals

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Chapter 1
Comparative Corporate Governance and Financial Goals
 End-of-Chapter Questions
1. Corporate goals: shareholder wealth maximization. Explain the assumptions and objectives of the shareholder wealth maximization pmodel.
Answer: The Anglo-American markets have a philosophy that a firm’s objective should follow the shareholder wealth maximization (SWM) model. More specifically, the firm should strive to maximize the return to shareholders, as measured by the sum of capital gains and dividends, for a given level of risk. Alternatively, the firm should minimize the risk to shareholders for a given rate of return. The SWM model assumes as a universal truth that the stock market is efficient. This means that the share price is
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Corporate governance is a broad operation concerned with choosing the board of directors and with setting the long run objectives of the firm. This means managing the relationship between various stakeholders in the context of determining and controlling the strategic direction and performance of the organization. Corporate governance is the process of ensuring that managers make decision in line with the stated objectives of the firm.
(b) The market for corporate control.
Answer: In cases where management does not behave as agents of the stockholders, the equity market provides a means for outside investors to replace the existing management and possibly the controlling shareholders through a takeover.
(c) Agency theory.
Answer: Management of the firm concerns implementation of the stated objectives of the firm by professional managers—agents—employed by the firm. In theory managers are the employees of the shareholders, and can be hired or fired as the shareholders, acting through their elected board, may decide. Ownership of the firm is that group of individuals and institutions which own shares of stock and which elected the board of directors. In countries and cultures in which the ownership of the firm has continued to be an integral part of management, agency issues and failures have been less a problem. In countries like the United States, in which ownership has become largely separated from management (and widely dispersed),
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