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In financial management earnings are usually valued highly. The main thing is not how much the firm earns but how much the investor makes from the firm. Although a company may make millions of dollars, if their stock is only worth a dollar potential investors are not making a profit. Potential investors look at the increase or decrease of the firm’s earnings over time, and the quality and reliability of the reported earnings. If a company reports a 150,000 dollars earning but say 100,000 dollars of that earnings is from credit this does not look good to the potential investors. Having that much of their income used into credit is not appealing to investors.
According to the foundations of financial management, shareholder wealth maximization is not a simple task, since the financial manager cannot directly control the firm’s stock price, but can only act in a way that is consistent with the desires of the shareholders. Stock prices are affected by expectations of the future as well as by the current economic environment; so much of what affects stock prices is beyond management’s direct control. Even firms with good earnings and favorable financial trends do not always perform well in a declining stock market over the short term. This is why when the economy is down the stock market seems to plummet over night. When the economy seems to right itself so does the stock market.
Management decisions affect stockholder wealth by every decision that is made. Company shareholders want to make sure that their money is not going to be wasted in case a company goes under. If the manager does not make the proper decisions the company might have to be part of a hostile takeover. A company that I worked for that this happened to was the transition from Eckerd’s to Rite-Aid. Many workers of the company lost hundreds to thousands of dollars on stocks that went under overnight. Investors are also making management more responsive to shareholders. Many managers have a lot of...