Aswath Damodaran 9
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.
