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Management is often rewarded with stock options in order to align their interests with shareholders. Discuss how this strategy might help toward the goal of financial management. How might the granting of stock options to management be detrimental or harmful to the goal?
Since higher profits means higher stock price, the management will do its best to raise the company’s profit since they own stocks of the company. This is to align management with shareholders’ interests. However, granting stock options to management may dilute the shares of the current shareholders and hence this may lead to losing confidence with the company that will lead to lower stock price. Another drawback is that it encourages excessive risk taking by management since the management who hold stock options share in the upside potential of stock price increase, but not in the risk of stock price losses....
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