CORPORATE FINANCE

Corporate Finance

Table of Contents

Introduction3

Discussion3

Conclusion6

Corporate Finance

Introduction

Much of theory of corporate finance related to the maximization of share price as the sole objective is associated when the managers make decisions. The financial decisions of the mangers differs in the short term share price maximization and long term share price maximization, as in most cases it is observed that the financial decisions are based on the maximization of short term share price. This may give the impression of surprising given the probable side costs, but there are reasons to focus on the short term maximization of share price in traditional corporate finance rather than long term share price maximization.

Discussion

The financial decisions of managers may bias on short-term share these prices are the most observable of all measures that can be used to judge the performance of a publicly traded firm. Unlike sales or earnings, which are updated each quarter or even once every year, share prices updated constantly to show the new information that is being revealed about the firm. Therefore, the managers receive immediate feedback from investors on every action that they take. A clear picture is the response of markets to a firm announcing that it plans to acquire another firm. While managers consistently paint a rosy picture of every acquisition that they plan, the stock price of the acquiring firm drops in roughly half of all acquisitions, suggesting that markets are much more sceptical about managerial claims (Damodaran, 2010, pp. 42-57).

Moreover, if the markets are efficient and the investors are rational then the prices of shared will show the long-term impacts on the decisions making process by the managers. Unlike accounting, measures like sales or earnings measures such as market share, which look at the effects on current operations of decisions made by a firm, the value of a share is a function of the long-term health and prospects of the firm. In a rational market, the short term share price rather than the long term share price is an attempt on the part of investors to measure this value. Even if, the managers make a mistake in their estimates, it can be argued that a noisy estimate of long-term value is better than a specific estimate of current earnings.

Managers should also focus on the share holders, as they are the important factor for the short term share price maximization. While there can be many corporate goals, but the most common goal for every company is the short term share price maximization. However, the goal of share price maximization itself depends on maximizing the satisfaction of stakeholder specially share holders (Graham, Smart and Megginson, 2009, pp. 7-21). Let us understand what does stakeholder means? Stakeholders include employees, creditors, suppliers, customers, owners and others who have a direct economic link to the company. When we use the word "Shareholders" it denotes to the owners of the company. If the interest of every stakeholder preserved, than it will lead to more satisfaction and in turn lead to increase in the market price ...