Lecture 4 Flashcards
In what ways does it matter who is/ are shareholders in a PLC vs LLC?
In a PLC, there is a bigger difference between being a shareholder and being an owner (i.e. parttaking in decision-making). Shareholders in a PLC usually have less effect of the everyday business
According to Fama, what is “the firm”?
- “The firm” is “a set of contract”
- Balancing of these contracts are important for governance
- Central contracts are “risk bearing and decision making”
- Everyone have risks, but the investors have the highest because they can only get rewarded if there is something left to share
According to the contractual perspective (property rights), describe the essence of the classical firm (Ownership of a firm is defined as holding the right(s) to:)
(Alchain & Demsetz, 1972)
The essence of the classical firm is identified here as a contractual structure with:
1. Joint input production;
2. Several input owners;
3. One party who is common to all the contracts on joint inputs;
4. Who has the right to renegotiate any inputs contract independently of contracts with other input owners;
5. Who holds the residual claim; and;
6. Who has the right to sell his central contractual residual status (i.e. sell the shares)
What is a Transaction cost?
- Should we do it ourselves or buy it externally?
- How do we finance our firm, with equity or dept?
Transaction cost economics focuses on the cost of enforcement or check-and-balance mechanisms
- internal- and external audit controls
- information disclosure
- independent outside directors
- separation of board chair from CEO
- different committees.
What depends if you should either make or buy?
Frequency
* How often do we use this resource?
* Do we need an accountant
Uncertainty
* Are we dependent on this specific resource? For example: energy
* Can we find it on the market or do we need it ourselves
Specificity
* Asset specificity - can you use it for other purposes ? Example: cash - low specificity
What characterizes shares vs equity
Equity
* high frequency and high specificity
* Cannot be sold, belongs to the firm
* A transaction (the share) that divides ownership to the equity.
Shares
* low specificity
* Can easily be sold to someone else
How is transaction cost theory related to CG?
- Equity and dept provide alternative governance structures.
- Transaction costs determine whether firms shall use the organization (equity) or markets (dept)
- Neither 100% dept nor 100% equity are optimal situations for the firm
- “The optimal mix of debt and equity will obtain when the effects of incentive dilution (from issuing new equity) and risk distortions (from issuing dept) are equalized at the margin.”
What are the pros and cons with financing through debt?
-
Pros
o Tax shields
o Debt signaling
o Management bonding -
Cons
o Increasing bankruptcy risks
o Incitive effects
o Increasing price/ cost of debt by increasing leverage
What are the differences between Agency theory and TCE (transactional costs)
AT:
* Unity of analysis: Individual
* Focal dimension: Incomplete contracts
* Focal cost concern: Residual loss
* Contractual focus: Ex ante alignment
TCE:
* Unity of analysis: Transaction
* Focal dimension: Asset specificity
* Focal cost concern: Maladaptation
* Contractual focus: Ex post governance
Institutional investors behave different depending on five different aspects:
- The intention with the specific investment;
- The size of the institution and the relative size of the investment;
- Competence within the institution;
- The risk inclination of the institution;
- Ownership structure of the firm invested in
An investor can choose to either voice or exit, what are different investors normal action when dissatisfied?
- Institutional investors prefer exit
- Private investors with a relatively small portion of total shares, tends to prefer exit
- Private investors with a relatively large portion of total shares, traditional capitalists that tends to prefer voice
- Shareholder who are also employed by the firm. Are not likely to use voice (can be hard to get heard)
- Foreign/ non-domestic investors. Are almost exclusively exit due to the fact they most often are institutional investors
