Finance project case 8

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The agency problem refers to the separation of ownership and control. Shareholders are the owners, but managers control the firm from day to day. Managers are expected to act as agents on behalf of the owners who are considered principals. Sometimes, however, managers act in their own self-interest. Some ways they might do this include excessive consumption of perks (e.g., flying the corporate jet to a personal vacation spot), just wasting time (e.g., now working), or making decisions without considering the effect on shareholder wealth (e.g., adding more employees so that they have a “kingdom” under their control).

Both target company CEOs and acquiring company CEOs may have goals that are different than the goals of their shareholders.

Post a paragraph describing the actions that one of these CEOs might take that would be contrary to the principle of shareholder value maximization; Describe how the action is against shareholder interest or how it might destroy shareholder value. Be clear in your discussion of whether you are talking about a target company CEO or an acquiring company CEO.

Within one week after the initial posting due date (i.e., by May 4th), look over the discussion posts of your classmates and do the following:

Make a recommendation to one of your classmates as to how to reduce the likelihood of the situation described by that classmate.

Answer the question: How do you think the situation described by your classmates could have been avoidable in the first place? If you think the situation is unavoidable, please explain further.