Tuesday, March 8, 2011

Ethics problem in Finance

I am going to copy and paste notes from my finance lecture notes. So ... here goes

Maximising shareholder wealth, or the share price, involves carefully evaluating each decision’s impact on cash flow amount, timing and risk. However, that statement includes nothing that directly incorporates the ethical aspects of decisions. The phrase “subject to ethical constraints” implies that there are ethical facets of business decisions that may or may not be a significant part of a decision’s cash flow projections. Think of all decisions being shifted through an “ethical funnel” – some decisions are unethical and do not make it through the funnel, while others are ethical and pass through the funnel. Examples of ethical considerations that might enter into decisions include not exaggerating product quality or durability, correcting environmental problems even though regulators or the general public would never know about then, and not exaggerating future cash flow projections in order to get a lower interest rate on a bank loan or bond issue. Each of these examples may decrease the size and delay the timing of cash inflows, or increase the riskiness of future cash flows – thereby reducing the share price relative to what it could have been had one acted unethically. No doubt you have thought of other examples as well.

Interesting it may seem. That is probably 2% of the test ... I need my lucks. Sob Sob

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