CC 2.1 : Managers involved in making acquisitions often argue that the immediate response of stockholders to acquisition announcements is flawed because stockholders do not have the information to make this judgment. Do you agree?
Answer: While it is true that managers have substantially more information than stockholders, they tend to be more biased and less objective than stockholders. This bias affects the judgment of managers and can lead them to make poor acquisition decisions.
CC 2.2: If you are convinced that financial markets are not efficient, do you have to abandon the objective of value maximization? Why or why not?
Answer: If financial markets are not efficient, then we may not be able to justify the objective function of maximizing stock prices. However, we can still focus on maximization of stockholder wealth or firm value.
CC 2.3: Corporate governance is best left to managers, since they are much more likely to think about the long term than stockholders. Comment.
Answer: While there are stockholders who have short time horizons, the same can be said about some managers. In fact, it is unfair to argue that stockholders are always more short term in their demands than managers. The evidence (some of which is cited in the text) is that stockholders are often willing to accept lower earnings and cash flows in the near term for higher growth in the long term.
CC 2.4: The interests of institutional investors and individual investors may sometimes diverge. Can you think of a scenario where the two groups might have conflicting interests?
Answer: Institutional investors may have more information than individual investors, and their tax status can be very different. These differences may cause conflicts of interests between these two groups of investors. Consider the scenario, where pension funds and individual investors both hold stock in a firm, which is considering returning the cash in the form of dividends. Pension funds, which are tax exempt, may want the dividends paid, and individual investors might not
CC 2.5: Many emerging financial markets are characterized by the absence of good information about firms, thin trading and extreme volatility. What are the consequences for value maximization in these markets? What about stock price maximization?
Answer: In emerging markets that are not very efficient, stock price maximization may not be the right objective for firms. Value maximization, however, does not require assumptions about market efficiency and still is the correct objective.