Critically examine the following quote:
“…the agency costs of [controlling minority shareholders] CMSs are increasing the larger the potential for private benefits extraction. This suggests that, in many countries around the world, the main agency problem is between CMSs and non-controlling shareholders rather than between managers and small, dispersed shareholders.”
Source: Cronqvist, M. and Nilsson, M. (2003). Agency costs of controlling Minority Shareholders. The Journal of Financial and Quantitative Analysis, Vol. 38, No. 4, pp.696.
Q2 Fourteen marks (14) plus one mark (1) for references (Word limit 1000 +/-100words)
Students are strongly urged to read reviewed journal articles and provide at least three academic journal articles in the reference. (Please refer to the “Please note” “1” and “2” on page 1).
Carefully consider the following two quotations.
“…Studies have shown that grants of stock options represent the largest component of CEO compensation in large publicly traded corporations in the United States (see, e.g. Hall and Liebman, 1998; Murphy, 1999). One prominent view is that executive stock options represent an efficient mechanism for tying pay to performance and there by aligning the interests of managers and shareholders. Another view, however especially in light of the recent corporate scandals of Enron, Tyco, and others, questions the efficacy of options-based compensation.” (This section is taken from Kato, H.K., Lemmon, M., Luo, M. and Schallheim, J. 2005, ‘An empirical examination of costs and benefits of executive stock options: Evidence from Japan’, Journal of Financial Economics, 78, pp.436).
“Anecdotel evidence and surveys suggest that managers believe that missing an earnings target can cause stock price drops (Graham et al. 2006). Empirical studies corroborate this notion (Skinner and Sloan 2002; Lopez and Rees 2002). Thus, a missed target could benefit an executive via lower strike price on subsequent option grants.” (This section is taken from McAnally, M.L., Srivastava, A. and Weaver, C. D. 2008, ‘Executive Stock Options, Missed Earnings Targets and Earnings Management’, The Accounting Review, 83(1), pp. 185).
You are asked to critically examine the executive stock options with reference to earnings management. (As part of your literature review on earnings management, you are advised to read academically reviewed articles—for your convenience, one such article - Hettihewa, S. and Wright, C. 2010. ‘A Review and Synthesis of Dominant and Emerging Concerns in Corporate Earnings Management’ Southern Business Review, 35(1), pp. 15– 37 is attached to the readings folder.