Concept Checks

2.1: Maximize stock price or stockholder wealth, with constraints on beng a good citizen
There is no correct answer to this question. It gauges what you think the objective function in decision making is and forces you to take a stand.

2.2: Companies which have done well in the last few years
Since I am giving incumbent managers more power, I am more likely to do this in a scenario where I trust them to deliver.

2.3: Biased
While incidences of fraudlent information become public frequently, relatively few firms out of the thousands in the United States are guilty of breaking the law. Most work within the law to provide as positive a view of their results and prospects as they can.

2.4: Companies which access markets infrequently to raise funds for operations
Firms which have to repeated come back to the market worry more about the damage that they will do to their reputation by misleading markets.

2.5: I do not agree with this statement
There seems to be a fair amount of evidence (such as the positive market reaction to R&D announcements) that would support the notion that markets are much more long term than most of their critics give them credit for.

2.6: I do not agree with this statement
Passing laws may punish the most egregious violators of social norms, but there will always be firms that stay on the right side of the law and create social costs, intentionally or unintentionally.

2.7: Yes.
Managers now also become the lead stockholders in the firm.

2.8: Yes. Their interests may deviate.
This is true especially when the inside stockholder is not diversified and is part of the top management of the firm. The inside stockholder may also get benefits from control that do not accrue to outside stockholders, and may take actions to increase control even at the expense of wealth.

2.9: Managers and employees of badly-run target firms
These are the firms most likely to be targets in hostile takeovers.

2.10: Maximize stock price or stockholder wealth, with constraints on beng a good citizen
My views have not changed. Has yours?