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Question - NBA Corp. is all equity financed. Its managers are currently engaging in some self-serving activities, such as taking significant time off playing golf, using corporate funds to purchase super-bowl tickets, and flying corporate jets for family trips. Shareholder monitoring can curb these activities. Suppose that the cost of monitoring is equal to $400,000 and as a result of the monitoring, managerial misbehavior will be reduced and firm value will increase instantly by $10 million.
a. Will a shareholder who owns 0.1% of the company have the incentive to monitor the managers, and why? (Show the computation)
b. Will a shareholder who owns 5% of the company have the incentive to monitor the managers, and why? (Show the computation)
c. What is the minimum percentage ownership for a shareholder to have the incentive to monitor the managers? (Show the computation)
d. What inference can you draw from this question about the incentives of shareholders to monitor managers?
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