Managerial Actions Affecting Firm Value
Qn. Discuss managerial actions that affect the value of the firm.
Managerial actions range from strategy decisions, to capital structure decisions to decisions on the composition of the managerial team.
• Dividend Policy
The dividends issued by a firm to its shareholders have a signalling effect to the market as they reflect the management's view on the future prospects of their firm. An increase in ordinary dividends by management is a sign of managerial optimism about the future.This has a two fold effect; firstly, by the dividend discounting model of valuing shares, the share values rise and in concert, the firm's value. Secondly, there will be a surge in the market to take up these shares with positive prospects. Market economics indicates their value will increase as demand outstrips supply.
The reverse applies when management decides to cut dividends due to pessimistic views on future performance; an initial drop in share value (and hence company value) via the......
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