Question

Number 11#

11. Why might one expect managers to act in shareholders' interests? Give some reasons. 12. Many firms have devised defenses that make it more difficult or costly for other firms to take them over. How might such defenses affect the firm's agency problems? Are managers of firms with formidable takeover defenses more or less likely to act in the shareholders interests rather than their own? What would you expect to happen to the share price when management proposes to institute such defenses?

Answer 1

Managers maybe expected to act in shareholder's interest when:

• Their interests are aligned that is to say that a large part of the compensation of managers is related to performance of the firm. Such performance measures may be market share, net income, cash flow etc.
• The board may keep a good oversight over managers and get them to work in shareholders' best interest.
• The managers may find the work to their liking and may like to work for the company.
• The manager may be working for a higher responsibility position and may try to provide a better value to the firm.
• Lastly, there are various managers who are ethical and nothing would stop them from working for the betterment of the firm