ACCY304 Midterm #1
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1. Firm (Class 1) allow groups of individuals to come together and contract with one another
hoping that the productivity of the whole is greater than the sum of its individ-
ual parts. contains employees, suppliers, labor unions, stockholders, customers,
banks, bondholders, and insurance firms.
2. Moral Hazard the post-contractual actions that individuals make that leave the other party worse
(Agency Prob- off. (ex: effort choice, perquisite taking, differential risk exposure, differential time
lems) horizons, and overinvestment).
3. Perquisite Tak- a thing regarded as a special right or privilege enjoyed as a result of one's position.
ing/Benefits Managers want benefits
4. Differential Risk managers typically have substantial levels of human capital and personal wealth
Exposure invested in the firm. this large investment can make managers appear excessively
risk-averse from the standpoint of the owners, who (at least in a large public
corporation) typically invest only a small fraction of their wealth in any one firm.
5. Differential Hori- managers have limited incentives to care about the cash flows that extend beyond
zons their tenure while owners are interested in the value of the entire future stream of
cash flows because it determines the price at which they can sell their claims in the
company.
6. Overinvestment when managers resist downsizing a firm, preferring to expand it ("empire build")
despite lack of profitable projects, and hesitate to lay off colleagues, especially
friends, in unprofitable divisions due to personal costs, while shareholders benefit.
7. Adverse Selec- the pre-contractual tendency of an individual with private information about some-
tion thing that affects a potential trading partner's costs or benefits to extend an offer
that would be detrimental to the trading partner. (ex: hidden information or skills).
8. Surplus it can be lost due to excessive agency problems. contracting parties can incur
costs (ex: accounting control systems) to protect it. refers to the positive difference
, ACCY304 Midterm #1
Study online at https://quizlet.com/_ixt4rg
between the total income earned and the expenses incurred in generating that
income, resulting in a net profit or excess revenue.
9. Bargaining Fail- asymmetric information can prevent parties from reaching an agreement even
ure when in theory a contract could be constructed that would be mutually advanta-
geous
10. Levers of Control hint: DIBB
diagnostic, interactive, belief, boundary systems
a control system that relies on various levers such as core values, risks to be
avoided, strategic uncertainties, and critical performance variables, all centered
around the business strategy. makes use of belief systems, boundary systems,
diagnostic control systems, interactive control systems.
11. Belief Systems defines basic values, purpose, and direction including how value is created, level
of desired performance, and human relationships; facilitates employee buy-in of
the company's core values and business strategy.
12. Boundary Sys- identifies the actions and risks that employees must avoid and there are formally
tems stated limits and rules which must be respected; identifies and prevents actions
that undermine the company's implementation of strategy.
Study online at https://quizlet.com/_ixt4rg
1. Firm (Class 1) allow groups of individuals to come together and contract with one another
hoping that the productivity of the whole is greater than the sum of its individ-
ual parts. contains employees, suppliers, labor unions, stockholders, customers,
banks, bondholders, and insurance firms.
2. Moral Hazard the post-contractual actions that individuals make that leave the other party worse
(Agency Prob- off. (ex: effort choice, perquisite taking, differential risk exposure, differential time
lems) horizons, and overinvestment).
3. Perquisite Tak- a thing regarded as a special right or privilege enjoyed as a result of one's position.
ing/Benefits Managers want benefits
4. Differential Risk managers typically have substantial levels of human capital and personal wealth
Exposure invested in the firm. this large investment can make managers appear excessively
risk-averse from the standpoint of the owners, who (at least in a large public
corporation) typically invest only a small fraction of their wealth in any one firm.
5. Differential Hori- managers have limited incentives to care about the cash flows that extend beyond
zons their tenure while owners are interested in the value of the entire future stream of
cash flows because it determines the price at which they can sell their claims in the
company.
6. Overinvestment when managers resist downsizing a firm, preferring to expand it ("empire build")
despite lack of profitable projects, and hesitate to lay off colleagues, especially
friends, in unprofitable divisions due to personal costs, while shareholders benefit.
7. Adverse Selec- the pre-contractual tendency of an individual with private information about some-
tion thing that affects a potential trading partner's costs or benefits to extend an offer
that would be detrimental to the trading partner. (ex: hidden information or skills).
8. Surplus it can be lost due to excessive agency problems. contracting parties can incur
costs (ex: accounting control systems) to protect it. refers to the positive difference
, ACCY304 Midterm #1
Study online at https://quizlet.com/_ixt4rg
between the total income earned and the expenses incurred in generating that
income, resulting in a net profit or excess revenue.
9. Bargaining Fail- asymmetric information can prevent parties from reaching an agreement even
ure when in theory a contract could be constructed that would be mutually advanta-
geous
10. Levers of Control hint: DIBB
diagnostic, interactive, belief, boundary systems
a control system that relies on various levers such as core values, risks to be
avoided, strategic uncertainties, and critical performance variables, all centered
around the business strategy. makes use of belief systems, boundary systems,
diagnostic control systems, interactive control systems.
11. Belief Systems defines basic values, purpose, and direction including how value is created, level
of desired performance, and human relationships; facilitates employee buy-in of
the company's core values and business strategy.
12. Boundary Sys- identifies the actions and risks that employees must avoid and there are formally
tems stated limits and rules which must be respected; identifies and prevents actions
that undermine the company's implementation of strategy.
