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

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 whoever performs the monitoring will incur a lump sum cost of $400,000. 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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