Control over a firm permits the possibility of changing the future cash flows. What is the likely result of a high level of control on share price?
A) There is little effect.
B) A share may be more highly valued by the controlling shareholder.
C) Changes in share value are delayed.
D) A share may be valued lower by the controlling shareholder.

Question

Quizplus · Accepted Answer

A controlling shareholder who has a high level of control over a firm can manipulate the firm's cash flows in ways that are favorable to them. This can lead to higher profitability and ultimately a higher valuation of the firm, which could translate into a higher share price. Conversely, if the controlling shareholder believes that the firm is performing poorly, they may undervalue the share price to try to reduce the value of the firm and buy back shares at a lower price. Therefore, a high level of control on share price is likely to have a significant effect, making choice B the correct answer.

Control Over a Firm Permits the Possibility of Changing the Future