Corporate Finance: Instructor\'s Manual Applied Corporate Finance

(Amelia) #1
Aswath Damodaran 41

So this is what can go wrong...


STOCKHOLDERS

Managers put
their interests
above stockholders

Have little control
over managers

BONDHOLDERS

Lend Money

Bondholders can
get ripped off

FINANCIAL MARKETS

Managers SOCIETY


Delay bad
news or
provide
misleading
information

Markets make
mistakes and
can over react

Significant Social Costs

Some costs cannot be
traced to firm

This is my worst case scenario:



  • Stockholders have little or no control over managers. Managers,


consequently, put their interests above stockholder interests.



  • Bondholders who do not protect themselves find stockholders


expropriating their wealth.



  • Information conveyed to markets is noisy, biases and sometimes


misleading. Markets do not do a very good job of assimilating this


information and market price changes have little to do with true value.



  • Firms in the process of maximizing stockholder wealth create large


social costs.


In this environment, stockholder wealth maximization is not a good objective


function.

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