MGMT 3020 Chapter Notes - Chapter 6: Limited Liability Company, Stock Market, Primary Market
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Unit 3.1 TextBook Notes
Chapter 6 – Who owns the Corporation
History of the Corporation
•prior to the concept of “limited liability” - introduced in the mid 19th century – corporate
charters were granted by the state as a privilege (not a right) under strict conditions in terms of
the projects that were to be completed (building a road, bridge etc.) and the length of time the
corporation was allowed to exist
•in the 1800s the state could by law, revoke the charter of a corporation if it failed to act in the
•Limited liability led to a shift in the operating principles of a the firm, profit became the
primary purpose and the parameters by which a firms success was measured changed
•executives today operate under the assumption that the firm’s primary obligation is no longer to
the state or society, but instead to operate in the interests of its owners – the shareholders
◦this is only a Belief, but it is widespread
•shareholders hold no actual rights that make them the owner of the corporation. No right of
possession nor the right of control or exclusion.
•the great value of limited liability is that it enabled corporations to raise the capital that was
needed to finance the infrastructure that fueled the Industrial Revolution
◦particularly it allowed firms to build railways, canals, bridges that were central to economic
development in the West (19th century)
◦in its origin the idea of shareholders being the firms owners had some validity because
while stocks were traded the primary purpose pf shares was to raise capital and provide a
return on that investment from the firm to its investors.
◦Over time, the shareholders role and value to the firm has evolved.
•The stock market is only a minor part in raising capital for the firm
◦subsequent third party exchanges of the shares results in no money being received by the
◦IPO (Primary market)
▪initial public offering of shares
▪shares prices are fixed by the issuing company
▪profits from share sales go directly to the company
▪buys are private, and limited to a minimum investment amount
◦Stock market (secondary market)
▪existing shares are traded
▪prices fluctuate according to supply and demand
▪no money is received by the firm, profits go to selling investor
•stock markets are neither efficient nor public
◦in terms of money flows being dictated by complete and freely available information
◦nor in terms of access being equally and evenly distributed
•the combination of “high-frequency” traders, holding positions for microseconds and massive
investment funds holding large but passive positions is redefining the meaning of shareholders.
•The Cumulative effect is for an individual investor to surrender any claim of ownership in favor
of managerial control.
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