chapter 4 (1) Flashcards
The public corporation
Jointly owned by a multitude of shareholders protected by limited liability, is a major organization innovation with powerful economic consequences
complete contract
Specifies exactly what the manager will do under each of all possible future contingencies, there will be no room for any conflicts of interest or managerial discretion
free cash flows
represent a firms interally generated funds in excess of the amount needed to undertake all profitable investment projects, that is, those with positive NPV’s
remidies for the agency problem
- Independent board of directors
- Incentive contracts
- Concentrated ownership
- Accounting transparency
- debt
- Overseas stock listings
- Market for corporate control
board of directors
in the united states, shareholders have the right to elect the board of directors, which is legally charged with representing the interests of shareholders. If the board of directors remains independent of management, it can serve as an effective mechanism for curbing the agency problem.
concentrated ownership
An effective way to alleviate the agency problem is to concentrate shareholdings. If one or a few large investors own significant portions of the company, they will have a strong incentive to monitor management. for example if someone owns 51 percent, he or she can definitely control the management
Accounting transparency
Strenthening accounting standards can be an effective way of alleviating the agency probllem. Self-interested managers or corporate insiders can have an incentive to “cook the books” to extract private benefits from the company.
overseas stock listings
Companies domiciled in countries with weak investor protection such as italy, korea and russia, can bond themselves credibly to better investor protection by listing their stocks in countries with strong investor protection
market for corporate control
Suppose a company continually performs poorly and all of its internal governance machanisms fail to correct the problem. This situation may prompt an outsider to mount a takeover bid. In a hostile takeover attempt, the bidder typically makes a tender offer to the target shareholders at a price substantially exceeding the prevailing share price.
dominant investors may acquire control through various schemes such as
- shares with superior voting rights
- pyramidial ownership structure
- Interfirm cross-holdings
pyramidial ownership structure
one controls a holding company that owns a controlling block of another company, which in turn owns controlling interest in yet another company and so on
private benefits of control
achieved once large shareholders acquire control rights exceeding cash flow rights
sarbanes oxley acat
The key objective of the act is to protect investors by improving the accuracy and reliability of corporate disclosue, thereby restoring the publics confidence in the integrity of corporate financial reporting
major components of the sarbanes-exley act
Accounting regulation: the creation of a public accounting oversight board charged with overseeing the auditing of public companies, and restricting the consulting services that auditors can provide to clients
Audit committee: The company should appoint independent financial experts to its audit committee
Internal control assessment: Public companies and their auditors should assess the effectiveness of internal control and financial record keeping and fraud prevention
Executive responsibility: Chief executive and finance officers must sign off on the companys quarterly and annual financial statements. If fraud causes an overstatement of earnings, these officers must return any bonuses
cadbury code
Has not been legislated into law and compliance with code is voluntary.
London stock exchange requires each listed company show whether the company is in compliance with the code and explain why if it is not
