Question

Executive compensation packages often tie performance to bonus and incentive awards, supplemental retirement packages, perquisites, and severance pay, in order to encourage the management team to align their performance with organizational goals.

In an attempt to minimize agency problems in a company (potential conflict of interest between the company's managers and shareholders), attractive compensation packages are created to retain and encourage managers. In the best interest of shareholders, compensation packages should be structured in a way such that managers have an incentive to maximize the     value of the company’s stock price.

Vision Tech is a software company based out of San Francisco. Its stockholders are mostly institutional investors and there is relatively little individual ownership. If these institutions dilute their positions and sell off their stake in Vision Tech’s stock to several individual investors, would direct shareholder intervention be more or less likely to motivate the firm’s management?

More likely

Less likely

Vision Tech’s stock price is currently trading at $22 per share. The consensus among analysts is that the intrinsic value of Vision Tech’s stock is $32 per share. Is Vision Tech more or less likely to receive a hostile takeover bid?

Less likely

More likely

Answer 1

Less likely, since the number of shareholders will increase with little shareholdings

More likely, since the stock is undervalued in the market as the market price is lower than the intrinsic value