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In what ways can the capital markets influence the decisions of managers? Can its influence be socially harmful?
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In what ways can the capital markets influence the decisions of managers? Can its influence be socially harmful? This essay deals with the effect of the capital market on the principal agent problem. It will be assumed that managerial incentives cannot perfectly motivate management to act in the best interests of shareholders and the public and the essay will analyse the different methods through which the capital markets influences managers to be more efficient. The essay will analyse the role of takeovers, competition and the threat of bankruptcy and closure, labour markets and the role of creditors. Each of these methods will be considered in turn and analysed in terms of how they induce efficiency in management, faults in the previously considered theory and lastly any socially harmful effects that arise out of each method. For instance the threat of takeovers will be considered to induce efficiency in management as they...
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