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Financial decisions should be consistent with the goal of shareholder wealth maximization
Financial decisions should be consistent with the goal of shareholder wealth maximization. However, there may be a divergence between shareholder wealth maximization and the actual goals of management. The primary reason for this is:
A) Management wants to ensure good public relations.
B) The Board of Directors is becoming increasingly uninvolved within the corporation.
C) Shareholders do not feel that wealth maximization is relevant.
D) There is a separation of ownership and control in corporations.
Expert Solution
The answer is D.
Shareholders would have possession over the business while managers have direct controlling and decision-making power. That generates conflicts between the two groups. If the managers are also the business owners, they will execute the investment decisions and business strategies with respect to the interests of shareholders. With that being said, some firms would reward managers with shares, instead of cash.
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