Question

CHAPTER 13:

In its 2001 annual report, investors of Adelphia Communications were startled to find a footnote in its financial statements that reported the company had guaranteed as much as $2.7 billion in loans to a private entity owned by CEO John Rigas and his family. As a result of the footnote, Adelphia lost more than 50 per- cent of its market value in little more than a week.

Question: Explain why you think the market value of Adelphia fell so dramatically with the footnote disclosure that the company had guaranteed loans to an entity owned by the company’s CEO and his family.

CHAPTER 14:

For many large, international companies that do business in less developed countries, corruption is a part of everyday life. Without bribing public officials, their companies could never build a factory, hire employees, get permission to build infrastructure, or receive shipments from international vendors. Shipping merchandise out of these countries can be equally difficult, with customs agents demanding unofficial payments to allow the shipment to be made.

1. If you worked for one of these companies, how would you respond to being asked by your boss to pay a bribe?

2. Are such bribes a necessary part of doing business abroad?

3. Most importantly, explain this in the context of the FCPA laws.

Answer 1

Solution:

13:

The value of Adelphia communications dropped because of a footnote that stated granting of loans of $2.7 billion to a private entity owned by the CEO and his family members. This is a case of agency theory where the CEO is using the powers we have within the organization to disburse loans as high as $2.7 billion to a private entity. The issues arise when the private entity is owned by the CEO and his family members. Hence, the CEO is using the power he holds within the organization to fund the private entity he holds which has no ties with the organization he currently works for. Hence, this is a classic case of principle-agent theory where the agent is working in his own favor to make the most of the position he holds to make personal profits out of the principles wealth and this is why it weakens the trust investors have on the management of the organization.

After the investors find out about such load disbursement the investors will definitely lose trust in the CEO who is taking away the investor wealth for personal gains and this is why many investors would drastically lose trust in the organization's ability to increase the shareholder's wealth and to avoid any further losses because of agency theory the investors would prefer a safe way of exiting their investments from the company. This is also because the investors now have minimal trust in the management who may have been working for personal gains that the objective of maximizing the shareholder value. Hence, resulting in an exodus of investors looking to safeguard their investments from such fraudulent management activities.

Hence, because shareholders do not have enough trust in the organization and are withdrawing their investments the sentiment about Adelphia Communication in the market will be negative and hence this will result in the exodus of investors leading to a downfall of the market value of the company in the market. This is why the market value of Adelphia Communications fell drastically within a week after such disclosure in their financial statements.

**Can solve only first question in a group of unrelated questions as per Chegg policy**