Lecture 1 - Agency theory and corporate governance

Question 1

Types of corporate firms

Answer 1

Sole proprietorship
Partnership
Limited corporation

Question 2

Sole proprietorship

Answer 2

Owned and managed by one person
Easy to form
Profits taxed as personal income
Funding limited by owners personal wealth

Question 3

Partnership

Answer 3

Easy to form
Requires partnership agreement
Limited and unlimited partners
Difficult to raise cash
Controlled by general partners

Question 4

Limited corporation

Answer 4

Limited liability
Profits taxed at corporate rate
Boars of directors
Private and public limited corporations

Question 5

Partnerships vs corporations

Answer 5

Liquidity and marketability: Partnerships have restricted trading, corporation can trade easily on exchange

Voting rights: Partnerships partners have control, corporation each share gives voting rights

Taxation of profits: Partnership taxed at personal rate, corporation taxed at corporate tax rate

Question 6

Agency theory

Answer 6

Provides description between management and shareholders
Equity shareholders own the company but powers are often restrictued and day to day decisions made by management
Managers act as agents for shareholder, use powers to run the company in shareholders best interest s

Question 7

Agency problems

Answer 7

Managers may seek to maximise their own wealth rather than shareholders
Managers have more information about company
Managers may have different attitude to risk

Question 8

Agency relationships

Answer 8

Type 1 - principal hires agent to represent their interests

Type 2 - Majority and minority shareholders