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Flashcards in KARHU QUESTIONS Deck (27)
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1

Private Benefits of Control: An International Comparison
What is Agency problem

conflict of interests between the company's management and the company's stockholder (which include shareholder and debt-holder)

2

Coase Versus the Coasians, Quarterly Journal of Economics
Why complete contracts are impossible?

People who finance the company(stockholders) and the management sign a contract that specifies what engagement does, i.e. what managers will do with their finance. And ideally there has to be signed a "complete contract" that specifies what it does in every state in the world. However, most future contingencies hard to describe and predict. And as result complete contracts are technologically impossible.

3

Coase Versus the Coasians, Quarterly Journal of Economics
How complete contracts are related to judges and regulators?

Judges must be able and more importantly willing to read complicated contracts and clarify what the result would be of each event that could happen and interpret ambiguous language (but contracts are written in business language which judges do not usually understand). That is why in the majority of countries (excluding USA) judges do not consider contracts deeply, so win those who pay more.

4

The Political Economy of Finance
Discuss the role of employees labor in the role of the conflict between managers and shareholders

1) Managers and employees most probably will collaborate with each other, because particularly managers hire the employees. Shareholder may not fire the employee, but managers may. So from this side employees will support managers.
2) Labor can be as a monitor for managers. Employees can see what managers do and if something going wrong they can go to court and start legal actions against managers. Sometimes employees have more power than shareholders, particularly in Sweden where trade unions have high bargaining power.

5

The Political Economy of Finance
What is the poison pill in frames of the article.

If the PBoC are high and the equity state for managers are small (so managers do not care about the company) managers have the incentive to transform employees into a poison pill by signing long-term labor contracts. For example if company A wants to acquire company B, and company B has employees with long-term labor contracts, company A has no possibility to fire them, hence desire for takeover by company A decreases (usually company which acquires another company makes a full transformation including change of employees).

6

Behind the Scenes: The Corporate Governance Preferences of Institutional Investors

Four potential issues that can prevent institutional investors from engaging in the portfolio company (OR impediments to engagement).

§Free rider problem
§Weak incentives (low benefits, low stake, limited resources)
§Legal barriers (“acting in concert”, diversification requirements)
§Structure of investment management industry
§Concern about future relationships with firms

7

The Political Economy of Finance
Mention one example for politics interventions of corporate government case by case(specific) basis or all of the game level (regulation).

Specific interventions.
Individual bank bail-outs or closure . It is individual case, because the government does not purchase all banks during the crisis.

Regulation (intervention for all).
Co-determination, a regulation in Germany when at least 50% of board should be employees. It is a law, which worked for each company in Germany.

8

The Political Economy of Finance
Discuss why the authors say that strong legal protection of creditors may be efficient ex-ante and creates in-efficiency ex-post


(very hard)

1) For instance, it may stregthen debt overhang problems. When any income earned after default must go to creditors, a debtor has little incentive
to work, or, at least, to do any work that is legal.
2) ex-post inefficiencies may be associated with collateral liquidation. Being more interested in recovering their money than in the overall company’s value, holders of collateral may strip the company of key assets and force its inefficient liquidation. Moreover, the liquidation of a firm can have
negative externalities for third parties: for instance, it may inflict costs on employees who have invested in firm-specific human capital, or on suppliers or customers who have come to depend on the firm’s operation
3)Strong legal protection of creditor rights over collateral may reduce their incentive to screen loan applications to an inefficiently low level

9

Coase Versus the Coasians, Quarterly Journal of Economics
Three differences between judges and regulators

Judges:
* Judge is independent
* He has weaker incentives, not motivated enough
* More likely to be lenient
Regulators:
* Is controlled by the government
* Easier to incentivize, as his wage depends on cases he will close
*That is why regulators are more likely abuse

10

A Survey of Corporate Governance
Why state ownership is inefficient/Criterias of state ownership.

§Disregard for social objectives
§Controlled by bureaucrats
§Often burden for government budget
§But are somewhat efficient in specific spheres (prisons)
§Also cooperatives are better at providing health or child care, as they are less focused on profits

11

Private Benefits of Control: An International
Comparison

Factors that curb PBoC:
(Legal institutions)

ØLegal Environment
ØDisclosure and Accounting Standards
ØLaw Enforcement
ØLegal protection of minority shareholders

12

Private Benefits of Control: An International
Comparison

Extra Legal institutions PBoC

ØProduct – market competition
ØPublic opinion & Media pressure
ØMoral norms
ØLabor (as a monitoring tool)
ØTax enforcement & compliance

13

The Corporate Governance Role of
the Media: Evidence from Russia
What is the role of media

(????)

§Diffusion (# of relevant groups)
§Credibility (foreign vs. local)
§Surrounding environment (Companies need financing and reputation; moral norms of the media are that of society)

14

The Corporate Governance Role of
the Media: Evidence from Russia
Definition of "Rational ignorance"

cost of obtaining information are higher than desire of obtaining information

15

Coase Versus the Coasians
Defenition of coase

Coase theorem:
"When property rights are well defined and transaction costs are zero, market participants will organize their transactions in ways that achieve efficient outcomes => NO NEED FOR GOVERNMENT TO INTERVENE.

16

Coase Versus the Coasians
Defenition of coasians

The Coasians:
"Most securities transactions involve private
arrangements to achieve efficiency, need contracts. Effective and complicated contracts need effective judicial enforcement.

17

Coase Versus the Coasians
Czech republic vs. Poland

Czech Republic (loose):
*Below average investor protection
*Government supervises markets
*Pro forma licensing, easy exams, no need for
«honest trading»
*No real power for the Commission to revoke
broker's licenses
*Significant problems in financial system
*Firms unable to rise capital and extensive tunneling
Poland (strict)
*Average investor protection
*Securities Commission for market supervision
(independent)
*Licensing by testing – had to do «honest trading» or lose license
*Extensive disclosure of information
*Relies on administrative control – increased interest in justice relative to enforcement
*Regulators become informed – reduce probability
of leniency

18

Corporate Ownership Around the World
What is meant by ultimate owner

Ultimate owner (aka controlling shareholder) holds directly or indirectly more than 20% (10% in second sample) voting rights.

Example: A owns 25% of B, while B owns 30% of C => A ultimate owner of C (indirect)

19

Corporate Ownership Around the World
5 types of Ultimate owners

1) a family or an individual
2) the State
3) a widely held financial institution such bank or insurance company
4) a widely held corporation
5) miscellaneous, such as a cooperative, a voting trust, or a group with no single controlling investor.

20

Corporate Ownership Around the World
criteria of family ownership

(????)

§Common, significant, and typically unchallenged
§69% of time families in control are also part of the management
§Controlling families are usually not monitored by other large shareholders
& second popular in the world

21

Corporate Ownership Around the World

How the article contradicts to Berle and Means statement.

Berle & Means claimed that “widely held corporation is a predominant form of ownership in the richest common law
countries” - however it is not predominant, because the difference between widely held firms and family controlled are 6% which too small. (36% vs 30%)

22

Agency Problems at Dual-Class Companies
what is agency problems

conflict of interests between the company's management and the company's stockholders (which include shareholders and debt holder)

23

Agency Problems at Dual-Class Companies
4 consequences of situation when investor voting voting rights diverse from investors cash-flow rights

* misuse of corporate cash (shareholders plays a lower value of corporate assets)
* Excessive CEO compensation (salary big when firm big, salary low, when leverage big; salary big, when volatility big)
* Acquisition decisions that: 1 - destroy company, 2 - benefits themselves
* CAPEX decisions - make such investment decisions that follow their own interests, but not maximizing shareholders value.

24

The Political Economy of Finance
What is the banking regulation

(?????????)

Banking regulation is another arena where political factors can play a role. A major source of conflict is that between large and small banks, who may be affected in opposite way by the implied changes in banking competition.
Another area of conflict is the balance between the protection of creditors rights and that of debtors interests in the design of bankruptcy law.

25

A Survey of Corporate Governance
The difference between the U.S&U.K and Japan&Germany

* Firms in the USA and UK substantially rely on legal protection of investors. Large investors are less prevalent , except the ownership is concentrated sporadically in the takeover process.
* In Japan and Germany is less reliance on elaborate legal protections, and more reliance on large investors and banks.

26

A Survey of Corporate Governance
Evidence of agency costs

§Managers resist takeovers to protect PBoC rather than defend then interests of shareholders.
§Managers overinvest rather than return money to investors
§When the executive dies, share price goes up (esp. for greedy corporations)
§Privatizing at a huge premium (Russia)

27

A Survey of Corporate Governance
Legal protection of shareholders

§Right to vote
§Right to appeal
§Affirmative “duty of loyalty” that restricts self-dealing
But:
§Rights of employees and creditors are better protected
§Voting rights can be expensive to exercise (meeting attendance, free rider problem)
§Boards are quite passive and act ex post
§Extent of protection varies largely between countries