Advanced corporate finance - Essay Example

In such scenarios, three forms of remunerations can be noteworthy. The first among these is the ‘share based compensation model’ that helps the managers as well as the employees to serve for better growth in the share pieces of a company, without affecting the cash reserves and therefore, ensuring financial stability. Nevertheless, the management may be concerned about the fact that potential hostile bidders may bid for the company in case it maintains a lower share price, whilst increasing price is certain to prohibit such take-overs.

It is also likely that the short-term shareholders may create pressure for achieving the returns that will create a potential damage for the company through the reduction of its intrinsic value. Majority of the times managers have to face pressure from the top-level management as well. Notably, as the shareholders always seek for a high dividend from the company, in order to retain these investors as well as increase their numbers, managers often get lured to deliver constantly increasing profit margin that in turn tends to facilitate returns, which may benefit the shareholders but will create potential damage to the company in long run.

It is thus that a manager may unintentionally harm the company by increasing the dividends irrespective of insufficient cash reserves or increase in the leverages. Manager’s loyalty and satisfaction from the company, indicating his/her intention to be a part of the entity, also play vital roles influencing their strategic intents to increase current share prices. From debt-holders, shareholders can expropriate wealth in various forms, which mainly include underinvestment, asset substitution and shortsighted investment among others.

For example, underinvestment can take place if the Net Present Value (NPV) is lesser than the debt to be borne by the investors. Assuming that two economies have equal rate of yield earned from