Corporation (2)
by MaestriThe bylaws are a set of rules drawn up by the founders of the corporation. Included are such points as (1) how directors are to be elected (all elected each year, or perhaps one-third each year for three-year terms); (2) whether the existing stockholders will have the ?rst right to buy any new shares the ?rm issues; and (3) procedures for changing the bylaws themselves, should conditions require it.
The value of any business other than a very small one will probably be maximized if it is organized as a corporation for these three reasons:
- Limited liability reduces the risks borne by investors, and, other things held constant, the lower the ?rm’s risk, the higher its value.
- A ?rm’s value depends on its growth opportunities, which, in turn, depend on the ?rm’s ability to attract capital. Because corporations can attract capital more easily than unincorporated businesses, they are better able to take advantage of growth opportunities.
- The value of an asset also depends on its liquidity, which means the ease of selling the asset and converting it to cash at a “fair market value.” Because the stock of a corporation is much more liquid than a similar investment in a proprietorship orpartnership, this too enhances the value of a corporation.
As we will see later in the chapter, most ?rms are managed with value maximization in mind, and this, in turn, has caused most large businesses to be organized as corporations. However, a very serious problem faces the corporation’s stockholders, who are its owners. What is to prevent managers from acting in their own best interests, ratherthan in the best interests of the owners? This is called an agency problem, because managers are hired as agents to act on behalf of the owners. We will have much more to say about agency problems in Chapters 12 and 13.
Taken From : Five-Minute MBA – Corporate Finance
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