![]() ![]() As the value of the shareholder's outside option decreases (an increase in ), the manager becomes more irreplaceable and can extract more rents from her decision-making position over time, for example, through an overall overinvestment in negative NPV projects (empire-building). This section of the statement of cash flows measures the flow of cash between a firm and its owners and creditors. 2 illustrates further the effect of managerial entrenchment on cash policies. These activities also include paying cash dividends, adding or changing loans, or issuing and selling more stock. The financing activity in the cash flow statement focuses on how a firm raises capital and pays it back to investors through capital markets. ![]() If the company is consistently issuing new stock or taking out debt, it might be an unattractive investment opportunity.
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