Shareholder Wealth Case Study

710 Words3 Pages
Maximisation of shareholders’ wealth is globally accepted as main goal of a firm. Shareholder wealth maximization is seen beneficial not only from the stockholders ' perspective, but also as for the society. Most corporations are owned by stockholders and within the construct of these companies are managers who are positioned with the one of the principal idea of maximizing shareholder wealth and increasing the growth of the intrinsic share value. Generally Shareholders are not involved in daily operations so they empower the managers to make decisions that are in best interest of the firm and consistent with the firm’s goal of wealth maximisation. However, sometimes the division of ownership and control in the organisations results in potential…show more content…
The source of asymmetric information is the manager-investor relationship, because, while managers can be assumed to have in-depth knowledge of the firm they are running whereas investors are unknown to the internal information of the company. For example, A and B are the potential buyer and seller of shares of company XYZ. If the seller knows the one of the manager in the company and has heard that the company is facing undisclosed financial problems, then the seller has asymmetric information. The capital structure decision, taken by managers, may then work as an indication to communicate insider information to external investors. Management often utilise the information to increase their own wealth, whereas, outside investors do not have access to that information. Managers learn how and when to make maximum profits from control of the firms’ operations which may establish them and pursue self-serving actions at the expenses of shareholders. Due to information asymmetry, shareholders do not have adequate information to assess if managers have satisfied their contractual
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