Week 1 papers Flashcards
Give a short summary of Jensen & Meckling (1992)
SPECIFIC AND GENERAL KNOWLEDGE, AND ORGANIZATIONAL STRUCTURE
Delegation is needed for efficiency (bring D to specific K) –> Delegation creates a control problem –> Cannot be solved with alienability (which markets can) –> Use internal rules and control systems.
What characterizes specific and general knowledge
Jensen & Meckling (1992): SPECIFIC AND GENERAL KNOWLEDGE, AND ORGANIZATIONAL STRUCTURE
Specific knowledge is hard and expensive to transfer
General knowledge is inexpensive to transfer.
What is the outcome of decentralization of decision rights if no agency problem exists?
Jensen & Meckling (1992): SPECIFIC AND GENERAL KNOWLEDGE, AND ORGANIZATIONAL STRUCTURE
If no agency problem exists, delegation of DR to persons with specific K leads to higher efficiency.
Why are control systems required and what does it hope to achieve?
Jensen & Meckling (1992): SPECIFIC AND GENERAL KNOWLEDGE, AND ORGANIZATIONAL STRUCTURE
Decision makers have self interests, so delegation creates agency problems.
Control systems required to align agents’ behavior with firm’s goals.
What is alienability?
Jensen & Meckling (1992): SPECIFIC AND GENERAL KNOWLEDGE, AND ORGANIZATIONAL STRUCTURE
The ability to transfer or sell decision rights to others (feature of capital markets, but not organizations).
How do markets solve rights assignment and control problems?
Jensen & Meckling (1992): SPECIFIC AND GENERAL KNOWLEDGE, AND ORGANIZATIONAL STRUCTURE
Markets solve rights assignment and control problems by granting alienable rights to individuals.
Lack of what causes organizations to need to use internal rules and control systems to manage decision-making?
Jensen & Meckling (1992): SPECIFIC AND GENERAL KNOWLEDGE, AND ORGANIZATIONAL STRUCTURE
Lack of alienability
Where does the agency cost of equity come from?
Jensen & Meckling (1976): THEORY OF THE FIRM: MANAGERIAL BEHAVIOR, AGENCY COSTS AND OWNERSHIP STRUCTURE
from delegation of decision rights from shareholders to CEO. He has limited equity, so he is not fully confronted with costs of perks. (Moral hazard)
What are costs of equity the sum of?
Jensen & Meckling (1976): THEORY OF THE FIRM: MANAGERIAL BEHAVIOR, AGENCY COSTS AND OWNERSHIP STRUCTURE
- Monitoring costs by the principal
- Bonding costs by the agent
- Residual loss
Who bears the entire effects of consuming perks and how?
Jensen & Meckling (1976): THEORY OF THE FIRM: MANAGERIAL BEHAVIOR, AGENCY COSTS AND OWNERSHIP STRUCTURE
Managers bear the entire wealth effects of consumption of perks as long as the equity market anticipates these effects.
Prospective shareholders realize interests diverge –> impound monitoring + residual into the price they are willing to pay for shares.
What are the agency costs of debt?
Jensen & Meckling (1976): THEORY OF THE FIRM: MANAGERIAL BEHAVIOR, AGENCY COSTS AND OWNERSHIP STRUCTURE
They use debt covenants
- Constraints on managerial actions
- Bankruptcy and reorganization costs.
- Costs of writing and enforcing covenants
Costs are incorporated in CoD
What is the inherent problem with debt financing?
Jensen & Meckling (1976): THEORY OF THE FIRM: MANAGERIAL BEHAVIOR, AGENCY COSTS AND OWNERSHIP STRUCTURE
Asymmetric payoff function of equity investor.
Why are a control system and DSM (PM for divisions) required for BUs?
Abernethy et al. (2004): Determinants of Control System Design in Divisionalized Firms
Control system is needed to align managers’ action with corporate goals (with decentralization), even while they operate independently. DSM (PM) are used to mitigate control problems.
When does the use of DSM (PM) increase and decrease?
Abernethy et al. (2004): Determinants of Control System Design in Divisionalized Firms
Increase: More decentralization
Decrease: More interdependencies
What is the result of greater information asymmetry
Abernethy et al. (2004): Determinants of Control System Design in Divisionalized Firms
More information asymmetry between BU and CEO leads to more decentralization
What is the result of more decentralization on DSM (PM)?
Abernethy et al. (2004): Determinants of Control System Design in Divisionalized Firms
When more decentralization, a greater weight is placed on DSM (PM) of performance.
In what context are personnel controls important to solve incentive alignment problem created by decentralization?
Campbell (2012): Employee selection as a control system
When it is difficult to determine if employees use decentralization effectively via measuring and contracting output (output controls)
Why does the new system with more decentralization make more use of selection of employees with particular attributes?
Campbell (2012): Employee selection as a control system
Because it is harder to use standard PMs to solve alignment problems.
What are the advantages and disadvantages of centralized hiring?
Deller & Sandino (2020): Who Should Select New Employees, Headquarters or the Unit Manager? Consequences of Centralizing Hiring at a Retail Chain
Centralized hiring: consistently align employees with company values / corporate goals, but can neglect BU managers’ local knowledge
What are the advantages and disadvantages of centralized hiring?
Deller & Sandino (2020): Who Should Select New Employees, Headquarters or the Unit Manager? Consequences of Centralizing Hiring at a Retail Chain
Decentralized hiring: exploit superior information of local manager in hiring decision (know more about local market and fit), but are less good at aligning employees with corporate goals.
When does centralized and when does decentralized lead to better hiring results?
Deller & Sandino (2020): Who Should Select New Employees, Headquarters or the Unit Manager? Consequences of Centralizing Hiring at a Retail Chain
If manager has more knowledge about local situation, centralized better
What are the primary goals of controls?
Sandino (2007):Introducing the First Management Control Systems (MCS): Evidence from the Retail Sector
- Minimize cost
- Enhance revenue
- Minimize risk
- Basic controls
What correlation exists between control and strategy?
Sandino (2007): Introducing the First Management Control Systems (MCS): Evidence from the Retail Sector
Firm with differentiation strategy more often use revenue control
What is the result for the fit between strategy and control?
Sandino (2007): Introducing the First Management Control Systems (MCS): Evidence from the Retail Sector
Firms that use differentiation strategies and revenue controls that have a fit, perform better.
Better fit, better results
What are arguments for and against contingency theory?
For: differentiation strategy use more revenue controls, and better results when fit.
Against: there are basic controls every firm has.
