3. The Theory of the Firm document, the Friedman article, and the information in

Question

3. The Theory of the Firm document, the Friedman article, and the information in chapter 4 argue that the main goal of a firm in a market economy is to maximize profit (shareholder wealth) over the long term. However, SEC regulations require U.S. corporations to publish operating results on a quarterly basis. How does this short term time frame impact long term profit maximization? Should the SEC change their regulations of public corporations to require only annual reporting of operations? How might this impact stock price in the short term? How do you believe that management deals with these two sometimes competing goals?

Explanation / Answer

The Theory of the Firm document, the Friedman article, and the information in chapter 4 argue that the main goal of a firm in a market economy is to maximize profit (shareholder wealth) over the long term. However, SEC regulations require U.S. corporations to publish operating results on a quarterly basis. How does this short-term time frame impact long term profit maximization? Should the SEC change their regulations of public corporations to require only annual reporting of operations? How might this impact stock price in the short term? How do you believe that management deals with these two sometimes-competing goals?

The SEC requires U.S. corporations to publish quarterly financial statements to ensure the economy is moving in the right direction. Firms and corporations who experience a decline in profit have the ability to catch the decline early and start making changes to correct the problems causing the decrease. If corporations only filed on an annual basis this would not be the case and many corporations may not realize they are losing revenue and profit quickly.

Quarterly reports inform consumers of the financial stability of corporations so when investing in the stock market this information is important. By reviewing the corporation

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