corporate governance

Question 1

what is the problem in corp governance

Answer 1

conflict of interest, incomplete contracts, managers and financiers have to allocate residual control rights and because financiers do not have the complete information, most residual control rights are in hands of managers.
complications: enforcement in court, free rider problem

Question 2

explain stewardship theory

Answer 2

manager wants to do a good job, there is no motivational problem, differences in performance arise from the fact that there is a misalignment between the structure and the way the manager works, organizational structure should define clear roles and empower management, organizational structure should give management the ability to implement plans for high corporate performance

Question 3

what are the ways a manager can expropriate value

Answer 3

consumption of perquisites, expanding the firm beyond optimal size, transfer pricing, selling assets below market value, staying to long as ceo, non-compete fees

Question 4

why do investors give their money to managers?

Answer 4

excessive investor optimism, managers care about their reputation, there are monitors in place, executive remuneration is linked to shareholder goals

Question 5

what monitors are there

Answer 5

board of directors
credit agencies, auditors, analysts
state