Name six types of managerial behaviors that can reduce a firm’s intrinsic value.

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Name six types of managerial behaviors that can reduce a firm’s intrinsic value.


Name six types of managerial behaviors that can reduce a firm’s intrinsic value.

Answer and explanationsSolution by a verified expert


Managerial behaviour that may decrease a firm’s intrinsic value are:

Non-productive activities: Managers spend most of their time and efforts on non-productive activities like tour & travels, meal & entertainment, useless meetings rather than focussing on productive activities that enhances the wealth of shareholders. Thus, it only results in an expense to the company rather than increasing its fundamental value.
Nonpecuniary benefits: Non-pecuniary benefits are non cash perks such as corporate jets, country club memberships and so on. Managers focus on using the corporate resources for their selfish benefits through consumption of perquisites rather than investing for the benefits of shareholders.
Informal relations: Managers generally avoid taking decisions that may harm their informal relationships inside or outside the company, even though the decisions are profitable for the company. Thus, not adding any value to the shareholders.
Risk averse: High return is the reward for taking high risk but managers are generally risk-averse as a risky decision might harm their reputation in case it turns out to be a bad decision.
Inaccurate use of free cash flow: Whenever a company generates free cash flow, the managers should pay back to investors and long-term debts at priority. However, managers tend to use it for making investment in other companies or marketable securities to increase the investment size.
Massage information: Sometimes, managers conceal or alter the useful information about internal or external affairs of the company in order to hide the discrepancies or losses and make the financial statements look good.

Verified Answer

Managerial behaviour that may decrease the firm’s intrinsic value are:

Managers may focus on performing non-productive activities instead of focusing on productive activities which actually increases the firm’s intrinsic value.
Managers may look for their nonpecuniary benefits out of the corporate resources.
Managers may overlook some beneficial projects just to protect their informal relations within the company.
Managers could avoid risky projects to maintain their reputation and position in the company in case the project would have actually failed, if taken.
Managers may misuse the free cash flow available with the company by investing it in unproductive assets instead of paying back to the investors.
Managers may sometimes present false information in front of shareholders.

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