It will be assumed that managerial incentives cannot perfectly motivate management to act in the best interests of shareholders and the public and the essay will analyse the different methods through which the capital markets influences managers to be more efficient. The essay will analyse the role of takeovers, competition and the threat of bankruptcy and closure, labour markets and the role of creditors. Each of these methods will be considered in turn and analysed in terms of how they induce efficiency in management, faults in the previously considered theory and lastly any socially harmful effects that arise out of each method. For instance the threat of takeovers will be considered to induce efficiency in management as they fear being replaced, however this threat might not be credible due to the possibility of share holder free riding and lastly takeovers have costly social effects such as reducing the incentive to invest human capital in careers and reducing the development of trust.

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