Textbook Problem

Executive salaries have been shown to be more closely correlated to the size of the firm than to its profitability. If a firm’s board of directors is controlled by management rather than outside? directors, this might result in the firm’s retaining more earnings than can be justified from the stockholders point of view. Discuss those statements, being sure (1) to discuss the interrelationships among cost of capital, investment opportunities, and new investment and (2) to explain the implied relationship between dividend policy and stock prices.