Ch1 - Introduction the Corporate Governance

Question 1

What are Corporations?

Answer 1

● Corporations are legal business structures that establish the business as separate from the owners.
● Economists view them as a “bundle of contracts”.
● They have several key characteristics: centralized management, limited liability for investors, free transferability of investor interests, and legal personality.

Question 2

Why are Corporations Important?

Answer 2

Corporations generate a large percentage of revenue and comprise a significant percentage of total businesses in the economy.

Question 3

What is Corporate Governance?

Answer 3

Corporate Governance seeks to align the interests of managers with those of the controlling shareholders while considering other stakeholders.

Question 4

What does corporate governance aim at and what does it provide?

Answer 4

• This discipline aims to prevent the expropriation of outside investors by insiders
• It provides assurance to investors that they will receive a return on their investment

Question 5

Agency Theory

Answer 5

This theory explores the relationship between a principal (shareholder) who delegates work to an agent (manager) and the challenges arising from conflicting goals and information asymmetry

Question 6

Fisher Separation Theorem

Answer 6

in a perfect capital market, individuals can independently make investment and consumption decisions, justifying the separation of ownership and control in corporations

Question 7

Stakeholder Capitalism

Answer 7

This concept emphasizes a broader responsibility of corporations towards stakeholders beyond shareholders, including employees, customers, suppliers, and communities

Question 8

Mechanisms of Corporate Governance

Answer 8

Internal Mechanisms
rights, concentrated ownership)
External Mechanisms

Question 9

Internal Mechanisms of CG

Answer 9

○ Incentives (compensation, managerial shareholdings)
○ Supervision by the board of directors
○ Ownership and shareholder rights (voting, minority

Question 10

External Mechanisms of CG

Answer 10

○ Cultural setting (business ethics)
○ Legal framework (auditing, disclosure)
○ Corporate control and takeovers
○ Leverage and debt
○ Product market competition
○ Financial analysts and media scrutiny

Question 11

The Classical Objective in Corporate Finance

Answer 11

• maximize the value of the firm (shareholder value)
• other goals are intermediary

Question 12

ESG

Answer 12

Environmental, Social and (Corporate) Governance

Question 13

CSR

Answer 13

Corporate Social Responsibility

Question 14

Robinson-Crusoe economy

Question 15

Reason for introduction of a capital market

Answer 15

increases the consumption set - and thus the wealth - of individuals (higher utility)

Question 16

Two consumption decisions

Answer 16

• objective production decision (real investment) that depends on the projects’ yields and interest rate (capital costs) but not on individual preferences
• financial decision that does depend on individual preferences for
  intertemporal consumption

Question 17

Shareholder vs. Stakeholder Banks

Answer 17

Private banks (e.g., UBS, Deutsche Bank, Citibank)
– profit maximizing,
– shareholder value approach.
Cooperative banks (e.g., Raiffeisen)
– central role of customers who are also owners,
– regional focus and support of customers.
Savings banks (e.g., Sparkassen)
– public law institutions with strong ties to municipalities or counties,
– regional focus.

Question 18

Visualisation of Separation of Ownership and Control

Answer 18

Question 19

Specialness of Banks in CG

Answer 19

Intrinsically high Leverage
- Conflicts between shareholders and debtholders
Complexity & opaqueness of bank activities
- Difficult monitoring by independent board members and depositors
Need for extensive regulation to avoid
- bank runs
- negative externalities