International Financial Mgt

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The commonly accepted goal of the MNC is to maximize shareholder wealth. Managers employed by the MNC are expected to make decisions that will maximize the stock price and therefore serve the shareholders. Some publicly traded MNC’s based outside the domestic country may have additional goals such as satisfying their respective governments, banks or employees. However, these MNC’s now place more emphasis on satisfying shareholders so that they can more easily obtain funds from shareholders to support their operations. a) Facing Agency Problems:

Managers of an MNC may make decisions that conflict with the firm’s goal to maximize shareholder wealth. For example a decision to establish a subsidiary in one location versus another may be based on the locations appeal to a particular manager rather than on potential benefits to the shareholders. A decision to expand a subsidiary may be motivated by a manager’s desire to receive more compensation rather than to enhance the value of the MNC. This conflict of goals between firm’s managers and their shareholders is often referred to as the agency problem. The costs of ensuring that managers maximize shareholder wealth (referred to as agency costs) are normally larger for MNC’s than for purely domestic firms for several reasons. First MNC”s with subsidiaries scattered around the world may experience larger agency problems because monitoring managers of distant subsidiaries in foreign countries is more difficult. Second, foreign subsidiary managers raised in different cultures may not follow uniform goals. Third, the sheer size of the larger MNC’S can also create larger agency problems. Fourth, some non domestic managers tend to downplay the short term effects of decisions which may result in decisions for foreign subsidiaries of the domestic based MNC’s that are inconsistent with maximizing shareholder wealth. b) Parent Control...
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