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Abstract:
This paper demonstrates that shareholder ownership, a sacred cow of business, is a myth. According to our legal system, shareholders do not own the Modern Corporation itself, nor do they own the corporate assets or profits. While this finding raises many important questions, the focus of this paper is on the accounting profession. By equating shareholders’ equity to net assets and having it encompass profit, the accounting equation implies that shareholders own the corporate net assets and profit. Insinuating that shareholders have stronger claims to corporate resources than they actually do runs counter to accounting profession’s prime directive to provide useful information. A solution would be to replace shareholders’ equity with its components, such that Assets = Liabilities Capital Retained Earnings. This would better reflect the reality that corporation’s have no legal obligation to give shareholders any of the net assets or profit.
shareholder ownership, corporate governance, accounting equation
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Abstract:
We report the results of an experiment designed to examine investment project selection under promotion incentives, modeled as tournament contracts. For a given expected return, the owner prefers investments with lower systematic risk. Therefore, to the extent managers select investments other than those yielding the highest risk-adjusted rates of return, they diverge from what the owner desires. In the presence of promotion incentives, we identify a situation in which the maximization of expected compensation by managers is incompatible with their selection of investment projects that maximize the risk-adjusted rate of return. The results indicated that subjects recognize the strategic implications of alternative promotion scenarios and respond to them in an opportunistic fashion.
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