week 1 - financial markets and the economy

Question 1

what is the value proposition for financial markets?

Answer 1

1. information role - capital flows to the companies with the best prospects
2. consumption timing - essential nature of investment (investing now for the future)
3. risk allocation - investors can choose their required risk level
4. separation of ownership and management
5. corporate governance and ethics - markets require trust, governance and ethics failures erode the economy and public support and confidence

Question 2

what are agency costs and how can they be mitigated?

Answer 2

agency costs: when the owners interests do not align with managers interests

they can be mitigated by:
- performance-based incentives
- BOD can fire management
- threat of takeovers.