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Bus 650

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| Week 1 Discussion 1 | Christopher Blevins | 7/26/2012 5:38:45 PM | | | Goals like avoiding unethical or illegal behavior cannot be in conflict with the goal of the firm. It should not be the goal of any firm to maximize profits by any legal means necessary. They would not be in business for long if they didn’t. Many accounting frauds have occurred because management wanted to increase shareholder value and make profits for themselves. Just ask Bernie Madoff. According to Ross, “our goal does not imply that the financial manager should take illegal or unethical actions in the hope of increasing the value of the equity in the firm.” Avoiding unethical or illegal behavior also cannot be the main goal of the firm. It is the goal of every firm, no matter which type, to maximize the owner’s profits or equity.Corporations can have many or few stockholders. When there are many stockholders, they cannot all make decisions because there will be too many opinions. Therefore a board is elected to manage and make decisions on their behalf. The stockholder’s and management’s relationship is known as an agency relationship. According to Ross, “Such a relationship exists whenever someone (the principal) hires another (the agent) to represent his or her interests.” It is possible that an agent might not act in the best interest of the principal. Conflicts of interests between the principal and agent are known as agency problems. Principals may avoid such conflicts through managerial compensation and job prospects. According to Ross, “Management will frequently have a significant economic incentive to increase share value for two reasons……Better performers within the firm will tend to get promoted.”References:Ross, S., & Westerfield, R., Jaffe, J., & Jordan, B. (2011). Corporate finance: Core principles and applications (3rd ed.). Boston, MD: McGraw-Hill Irwin. | |

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