Essay by freedomroadUniversity, Bachelor'sA, April 2008

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According to corporate finance theorists, the objective of the firm should be to maximize value or wealth. This means for stockholders to maximize stock prices. By focusing on maximizing stockholder wealth, the firm exposes itself to the risk that managers, who are hired to operate the firm for stockholders, may have their own objectives. This can lead to conflicts between both parties. Stockholders have the power to discipline and replace managers who do not attempt to maximize their wealth. For managers there are several techniques to protect themselves for these actions (Osano, 2001).

In other words: stock price maximization is the most important goal of most corporations. Stockholders own the firm and elect the board of directors, who then appoint the management team. Management is supposed to operate in the best interests of the stockholders. However, it is known that because the stock of most large firms is widely held, the managers of large corporations have a great deal of autonomy.

This means that managers might pursue goals other than stock price maximization. Therefore managers run the risk of being removed from their jobs, either by the firm's board of directors or by outside forces.

Hostile takeover is a process that occurs when management does not want the firm to be taken over. These are most likely to occur when a firm's stock is undervalued relative to its potential because of poor management. In a hostile takeover, the managers of the acquired firm are generally fired, and any who are able to stay on, lose the autonomy they had prior to the acquisition.

A potential agency conflict arises whenever the manager of a firm owns less than a substantial percentage of the firm's common stock. In most large corporations, agency conflicts are...