Financial decisions should be consistent with the goal of shareholder wealth maximization.However, there may be a divergence between shareholder wealth maximization and the actual goals of management.The primary reason for this is:
A)Management wants to ensure good public relations.
B)The Board of Directors is becoming increasingly uninvolved within the corporation.
C)Shareholders do not feel that wealth maximization is relevant.
D)There is a separation of ownership and control in corporations.

Question

Quizplus · Accepted Answer

The primary reason for the possible divergence between shareholder wealth maximization and the actual goals of management is the separation of ownership and control in corporations. Shareholders (the owners) often delegate decision-making authority to management, who may have their own objectives, such as maximizing their own salaries, job security, or business growth, which may not be consistent with shareholder wealth maximization. Therefore, shareholders may need to use various mechanisms (e.g. Board of Directors, executive compensation, shareholder activism) to align their interests with those of management and ensure their wealth maximization goals are met.

Financial Decisions Should Be Consistent with the Goal of Shareholder