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Chapter 6

MGMT 3020 Chapter Notes - Chapter 6: Limited Liability Company, Stock Market, Primary Market


Department
Management
Course Code
MGMT 3020
Professor
Mark Juhasz
Chapter
6

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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
public good.
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.
Shareholders
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
firm.
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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