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Mba 723

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MBA 723-41D

1. The idea of separation of ownership and control is fairly straight forward. If a manager has 100% ownership of the firm, then they always act in a manner they perceive to be in the best interest of shareholders because they are the only shareholder. As we have noted in the notes and discussions, large American corporations had evolved to the point that the top managers/executives have very little ownership of the company (less than 1% in most cases).
a) Assume that we have a CEO that does not have 100% ownership of the company but has an ownership stake of 33% with no other shareholders having a significant ownership stake in the corporation so that the CEO has effective control over decision making in the organization. What are some of the advantages of the CEO having such a large ownership stake in terms of controlling agency costs? (3 pts)
As this particular CEO essentially wears two hats, manager and large shareholder, there is an incentive to maximize the value of the firm. Every decision this CEO makes as a manager will impact the value of the company and thus his own personal wealth. As this CEO has a significantly greater vested interest in the performance of the company, he or she is likely to keep agency costs at a level that allows for a greater margin of profit.
Also, as stated in the book, Corporate Governance, Third Edition, by Kim, Nofsinger, and Mohr, “a person whose wealth is significantly tied to a firm and is also directly responsible for running the firm…minimizes conflict of interest problems between owners and managers”. In effect, the duality of these roles cause owner and manager to be one in the same.
b) What are some of the disadvantages of the CEO having such a large ownership stake in terms of agency costs? (3 pts)
A disadvantage to a CEO being the majority shareholder is that his managerial decision making

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