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1、GOALOFFINANCIALMANAGEMENTFORAPUBLICLYTRADEDCORPORATION,THEGOALSHOULDBETOMAXIMIZESHAREHOLDERWEALTHBYMAXIMIZINGSHAREPRICE.WHY?BECAUSETHESHAREHOLDERS,ASRESIDUALOWNERS,TAKETHEGREATESTAMOUNTOFRISKAMONGALLTHESTAKEHOLDERS.THEIRDIVIDENDSAREPAIDFROMAFTER-TAXEARNINGS,AFTERALLOTHEREXPENSESHAVEBEENAC
2、COUNTEDFOR.ALSO,INTHEEVENTOFBANKRUPTCYANDLIQUIDATION,THESHAREHOLDERSARETHELASTTOBEPAIDAFTERALLOTHERCLAIMSHAVEBEENMET.ISTHISGOALINCONSISTENTWITHTHEWELFAREOFOTHERSTAKEHOLDERSSUCHASCREDITORS?NO.IFTHEFIRMMISCHANNELSTHEBORROWEDFUNDSAND/ORFAILSTOGENERATETHECASHFLOWSTOPAYINTERESTANDPRINCIPAL,LEN
3、DERSWILLRAISEINTERESTRATESFORFUTUREBORROWINGSORTAKEOTHERAPPROPRIATEACTIONSNOTEXCLUDINGFORCINGTHEFIRMTOBANKRUPTCYEMPLOYEES?NO.IFTHEFIRMFAILSTOTAKECAREOFITSEMPLOYEESBYPAYINGCOMPETITIVEWAGESANDBENEFITS,PROVIDINGAPPROPRIATETRAININGANDCREATINGASAFEANDHARASSMENT-FREEWORKINGENVIRONMENT,EMPLOYEE-
4、PRODUCTIVITYMAYDECLINEANDTURN-OVERWILLBEHIGH,AFFECTINGREVENUES,PROFITSANDSHAREHOLDERS’WELFARECUSTOMERS?NO.IFTHEFIRMFAILSTOTAKECAREOFITSCUSTOMERSBYPROVIDINGQUALITYPRODUCTSANDSERVICESATCOMPETITIVEPRICESORFAILSTOFULFILLWARRANTIES,THEYWILLGOTOCOMPETITITION,THEREMAYBELAWSUITSANDSALESWILLFALLAN
5、DCOSTSWILLINCREASE,AFFECTINGSHAREHOLDERS’WELFARESOCIETY?NO.IFTHEFIRMFAILSTOFOLLOWTHELAWSOFTHESOCIETYAND/ORENGAGESINETHICALVIOLATIONS,ITMAYFACELITIGATION,FINESANDSOCIALOSTRAZIATION,RESULTINGINREVENUEDECLINES,COSTINCREASES,PROFITDECLINES,ALLAFFECTINGSHAREHOLDERS’WELFARE.THUS,SHAREHOLDERS’WE
6、ALTHMAXIMIZATIONISACONSTRAINEDOPTIMIZATIONPROBLEM.AGENCYPROBLEMSGIVENTHEGOALOFSHAREHOLDERS’WELFAREMAXIMIZATION,WHATISTHEGUARANTEETHATMANAGERSWILLPURSUETHISGOALDILIGENTLY?THEPROBLEMWHENMANAGERSFAILTOPURSUETHEGOALOFOWNERS’WELFAREMAXIMIZATIONISREFERREDTOASAGENCYPROBLEM.AGENCYPROBLEMINVOLVING
7、MANAGERSMAYBEOFTWOKINDS:A.MAMGAERSVSSHAREHOLDERSMANAGERSMAYSQUANDERRESOURCESMAYNOTTAKEAPPROPRIATERISKMAYSTRIVETODEPRESSSTOCKPRICESFORLEVERAGEDBUYOUTMAYENGAGEINOTHERSIMILARACTIVITIESRESOLVEDBYTHREATOFFIRINGBYSTOCKHOLDERSTHREATOFOUSTERAFTERAHOSTILETAKEOVERCOMPENSATION
