Lecture 2 Flashcards
Shareholders
Are the residual owner of the firm
Have voting rights about firm decisions
Nominate board of directors
Challenges of sharholders
Inclomplete contract
Separation of ownership and control
Managers pursue self-interest
Information asymmetry
Hard to monitor and verify
Agency costs in the corporate world
CEO pursuing self interest
Shirking
Management perks
Tunneling
Management entrenchment
Excessive risk taking:
Empire building
Accounting frauds
Agemncy problems within organizations are costly too!! management accounting addresses this!
Shirking
Even talented managers may find themselves slacking if not properly disciplined
Extremely hard to monitor someone with unique skills and knowledge
This is why such a person is hired
It requires an expert to monitor an expert
CEO perks
Executives tend to over-spend on perks
Fancy offices
Corporate jets
Dinners
Parties
(Paper by david yermack)
Identify wasteful spending by corporate jet usage disclosure for personal purposes
High usage firms suffer badly
Even more than direct costs associated
Tunneling
The transfer of assets and profits out of firms for the beneift of those who control them
Tunneling (expropriation of funds)
Managerial theft of corporate assets
Favoring companies owned themselves or by relatives
Excessive compensation
Limiting shareholders voting rights
FTX scandal
FTX, the leading crypto currency exchange
Founder sam bankman-fried (SBF) has transferred 2 billion from FTX entities for personal use
SBF and five members of his inner circle transferred 3,2 billion into their personal accounts in the forms of payments and loans
Management entrenchment (Takeover prevention)
Management could protect their control right in the following anti takeover mechanisms
Poison pill
golden parachute
Staggered board
Poison pills
To allow existing shareholders to purchase extra shares at discount - to dilute shares
Golden parachute
To give generous payment to executives after acquisition
Staggered board
Classify board to prevent board being replaced at once
Twitter poison pill example
Twitters management launched poison pills to fight the hostile takeover by elon must
The poison pill allowed existing shareholders to buy twitters shares at a discount
The aim is to dilute the shareholding of an unwelcomed bidder
Empire building (managerial incentive)
Prestige of managing a big company
Job security
Complexity of firm structure frustrates monitoring
Empire building is the pursuit to enlarge the size, scope, and influence of an individual or organization’s power. Increasing market share, buying power, or deal-making influence are all elements to empire building
Accounting frauds
Many compensation targets are linked to short term financial performance of the firm
Managerial incentives to
Inflate current profits (at the expense of future profits)
Inflate expectations (over emphasize good news)
Hide or delay bad news (till after crucial date)
