KARHU QUESTIONS Flashcards
Private Benefits of Control: An International Comparison
What is Agency problem
conflict of interests between the company’s management and the company’s stockholder (which include shareholder and debt-holder)
Coase Versus the Coasians, Quarterly Journal of Economics
Why complete contracts are impossible?
People who finance the company(stockholders) and the management sign a contract that specifies what engagement does, i.e. what managers will do with their finance. And ideally there has to be signed a “complete contract” that specifies what it does in every state in the world. However, most future contingencies hard to describe and predict. And as result complete contracts are technologically impossible.
Coase Versus the Coasians, Quarterly Journal of Economics
How complete contracts are related to judges and regulators?
Judges must be able and more importantly willing to read complicated contracts and clarify what the result would be of each event that could happen and interpret ambiguous language (but contracts are written in business language which judges do not usually understand). That is why in the majority of countries (excluding USA) judges do not consider contracts deeply, so win those who pay more.
The Political Economy of Finance
Discuss the role of employees labor in the role of the conflict between managers and shareholders
1) Managers and employees most probably will collaborate with each other, because particularly managers hire the employees. Shareholder may not fire the employee, but managers may. So from this side employees will support managers.
2) Labor can be as a monitor for managers. Employees can see what managers do and if something going wrong they can go to court and start legal actions against managers. Sometimes employees have more power than shareholders, particularly in Sweden where trade unions have high bargaining power.
The Political Economy of Finance
What is the poison pill in frames of the article.
If the PBoC are high and the equity state for managers are small (so managers do not care about the company) managers have the incentive to transform employees into a poison pill by signing long-term labor contracts. For example if company A wants to acquire company B, and company B has employees with long-term labor contracts, company A has no possibility to fire them, hence desire for takeover by company A decreases (usually company which acquires another company makes a full transformation including change of employees).
Behind the Scenes: The Corporate Governance Preferences of Institutional Investors
Four potential issues that can prevent institutional investors from engaging in the portfolio company (OR impediments to engagement).
§Free rider problem
§Weak incentives (low benefits, low stake, limited resources)
§Legal barriers (“acting in concert”, diversification requirements)
§Structure of investment management industry
§Concern about future relationships with firms
The Political Economy of Finance
Mention one example for politics interventions of corporate government case by case(specific) basis or all of the game level (regulation).
Specific interventions.
Individual bank bail-outs or closure . It is individual case, because the government does not purchase all banks during the crisis.
Regulation (intervention for all).
Co-determination, a regulation in Germany when at least 50% of board should be employees. It is a law, which worked for each company in Germany.
The Political Economy of Finance
Discuss why the authors say that strong legal protection of creditors may be efficient ex-ante and creates in-efficiency ex-post
(very hard)
1) For instance, it may stregthen debt overhang problems. When any income earned after default must go to creditors, a debtor has little incentive
to work, or, at least, to do any work that is legal.
2) ex-post inefficiencies may be associated with collateral liquidation. Being more interested in recovering their money than in the overall company’s value, holders of collateral may strip the company of key assets and force its inefficient liquidation. Moreover, the liquidation of a firm can have
negative externalities for third parties: for instance, it may inflict costs on employees who have invested in firm-specific human capital, or on suppliers or customers who have come to depend on the firm’s operation
3)Strong legal protection of creditor rights over collateral may reduce their incentive to screen loan applications to an inefficiently low level
Coase Versus the Coasians, Quarterly Journal of Economics
Three differences between judges and regulators
Judges:
* Judge is independent
* He has weaker incentives, not motivated enough
* More likely to be lenient
Regulators:
* Is controlled by the government
* Easier to incentivize, as his wage depends on cases he will close
*That is why regulators are more likely abuse
A Survey of Corporate Governance
Why state ownership is inefficient/Criterias of state ownership.
§Disregard for social objectives
§Controlled by bureaucrats
§Often burden for government budget
§But are somewhat efficient in specific spheres (prisons)
§Also cooperatives are better at providing health or child care, as they are less focused on profits
Private Benefits of Control: An International
Comparison
Factors that curb PBoC:
(Legal institutions)
ØLegal Environment
ØDisclosure and Accounting Standards
ØLaw Enforcement
ØLegal protection of minority shareholders
Private Benefits of Control: An International
Comparison
Extra Legal institutions PBoC
ØProduct – market competition ØPublic opinion & Media pressure ØMoral norms ØLabor (as a monitoring tool) ØTax enforcement & compliance
The Corporate Governance Role of
the Media: Evidence from Russia
What is the role of media
(????)
§Diffusion (# of relevant groups)
§Credibility (foreign vs. local)
§Surrounding environment (Companies need financing and reputation; moral norms of the media are that of society)
The Corporate Governance Role of
the Media: Evidence from Russia
Definition of “Rational ignorance”
cost of obtaining information are higher than desire of obtaining information
Coase Versus the Coasians
Defenition of coase
Coase theorem:
“When property rights are well defined and transaction costs are zero, market participants will organize their transactions in ways that achieve efficient outcomes => NO NEED FOR GOVERNMENT TO INTERVENE.
