Question

Firms must provide the right incentives if they are to get to focus on long-run value maximization. Conflicts exist between managers and stockholders and between stockholders (represented by managers) and . Managers' personal goals may compete with shareholder wealth maximization. However, managers can be motivated to act in their stockholders' best interests through (1) reasonable packages, (2) firing managers, and (3) the threat of hostile takeovers. If a firm's stock is undervalued, corporate raiders will see it as a bargain and will attempt to capture the firm in a hostile takeover.

Answer 1

Conflicts exist between managers and stockholders and between stockholders (represented by managers) and DEBTHOLDERS.

Step-by-step explanation:

A corporation's debt is usually divided between bank loans and/or bonds issued.

• Bondholders usually must receive fixed payments (coupon) regardless of how the corporation is doing, while stockholders earn money through distributed dividends (only if the company makes a profit) and by sales transactions (only if they sell at a higher price that what the price they paid for the stocks).
• Banks should also receive their payments regardless of the corporation's performance.

The larger the debt, the more serious the stockholders vs. debtholders conflicts, since the main risk is assumed by the stockholders, while debtholders will always try to protect themselves.