Introduction
Corporate Governance & Social Responsibility
There also may be foundations who have stake in a firm: like religious foundations or charities.
Asynchronous: not live, watch video, read part of paper.
Course schedule has right times & zoom sessions.
Weekly assignments, has to be done before certain time.
1 ment.io discussion per week: don’t procrastinate until last moment.
Short, straight to the point. Not only liking but also answering and commenting.
1.5 hours final exam on computer.
Assignment due December 7th.
- Written & video
,Lecture 1
Agency Problem
(Topic 2 Financial Management pre-master)
Both agent and principal are maximizing their utility.
May result in Moral Hazard, because of information asymmetry.
Mitigating through complete contracts. These should specify what managers should do in each
possible state of the world. And what distribution of profits will be in these cases.
But not really possible, not everything can be thought of beforehand.
Williamson (1984) says this. These contracts are too complex.
Agent knows more than the principle. They can also manipulate the information the principal
receives. Principle cannot keep track of what agent is doing at all times.
Separation of ownership & control Jensen & Meckling (1976).
Agency costs. Sum of:
- Monitoring. Principal observing the agent and keeping a record of their behavior.
Intervening in various ways to constraint agent.
- Bonding costs. Costs incurred by agent in order to signal credibly to the principal that she
will act in the interest of the principal. (Buying shares for example)
- Residual loss.
Two forms of agency problems
- Perquisites. Consumption by the management, benefit: accrue to the management, cost:
borne by the shareholders.
- Empire building. Free cash flow problem. Management pursuing growth rather than
shareholder maximization. Managers investing in negative NPV projects: destroying
shareholder value. Size of firm is related to CEO pay.
Most firms have a dominant shareholder.
Two different types of shareholders:
- Controlling shareholders
- Minority shareholders
Expropriation of minority shareholders.
- Tunnelling: asset sales. Large shareholder can expropriate gains. It has power.
- Transfer pricing: overcharging for the services and products.
- Nepotism: appointing family members to top management positions. Managerial
entrenchment: protecting against hostile takeovers and internal disciplinary actions.
- Infighting: Fight among the large shareholders, typically between family members.
Leveraging control and increasing the potential for expropriation. Different levels of firms. Dilute the
dollar stake, while still maintaining full control over investment strategies.
,Lecture 3
Dall-e
Openai.com/dall-e-2
Residual loss: differences between corporate decisions between owner-manager
After hiring someone it’s hard to monitor them whether they are really a ‘good’ CEO. Do they have
the right incentives to be one?
Adverse selection problem: we cannot distinguish good from bad managers beforehand. But is not a
moral hazard problem.
If CEO is active in M&A and the incentives are aligned: positive share price response.
A negative response means the shareholders ‘hate’ what the CEO is doing.
- Insufficient effort: target was not carefully chosen, no proper due diligence and price
negotiations.
- ..
Accounting manipulation cannot trigger negative share price response, rather trigger negative
permanent level of prices.
Tunneling somewhat illegal: manager should take all shareholders into account and not only
majority.
Often used to avoid paying taxes.
Tunnelling requires existence of minority shareholders who share the loss
Why do we care about if CEOs are paid for ‘luck’?
- Does not say anything about their abilities.
Does firm value depend on the effort of the CEO? Then you care about the CEO pay.
Skimming: CEO takes control of the compensation-setting process, and can set their own pay. How?
- Entranchement: packing board with supporters
- Complexity of the pay process
Paper
Oil price fluctuates a lot. CEO pay moves alike most of the time.
The only few times they don’t: oil prices are going down a lot! And pay goes up.
Kinds of luck:
Movement in exchange rates
Mean industry profitability
2SLS: 2-stage least squares
Performance can be determined by luck.
That regression is used to predict performance, strip anything else and use only performance from
luck.
Pay to performance: replace observed performance by performance driven by luck.
Accounting rate (performance) on pay.
Performance based on luck: 3x larger.
, Pay to luck becomes stronger when we look at instrumental variable.
There’s a correlation between pay and luck: luck plays a role.
Exchange rates: we observe the same.
CEOs can increase both cash component and performance based component in times of good luck.
CEO rewarded at least as much for a lucky dollar as for a regular dollar.
How to measure governance?
- Dummy capturing large shareholders
- If these are on the board
- Board size
- Fraction of insiders on the board
(More insiders = less monitoring)
Good corporate governance weakens pay for luck.
Not optimal for shareholders.
10-35%:
Compare magnitude of -1.48 against 4.49 in the Governance measure table (slide 5/6)
Mandatory group assignment:
About topics we will get in class, not yet so maybe smart to wait a little.
Read 3 websites: starting material.
Pick a casestudy that you like.
Record your presentation of main findings.
2 main questions: little parts within easy to divide.
1: 4-6 pages
2: 2 pages
Maximum of 8 pages.
Event study on case study.
Corporate Governance & Social Responsibility
There also may be foundations who have stake in a firm: like religious foundations or charities.
Asynchronous: not live, watch video, read part of paper.
Course schedule has right times & zoom sessions.
Weekly assignments, has to be done before certain time.
1 ment.io discussion per week: don’t procrastinate until last moment.
Short, straight to the point. Not only liking but also answering and commenting.
1.5 hours final exam on computer.
Assignment due December 7th.
- Written & video
,Lecture 1
Agency Problem
(Topic 2 Financial Management pre-master)
Both agent and principal are maximizing their utility.
May result in Moral Hazard, because of information asymmetry.
Mitigating through complete contracts. These should specify what managers should do in each
possible state of the world. And what distribution of profits will be in these cases.
But not really possible, not everything can be thought of beforehand.
Williamson (1984) says this. These contracts are too complex.
Agent knows more than the principle. They can also manipulate the information the principal
receives. Principle cannot keep track of what agent is doing at all times.
Separation of ownership & control Jensen & Meckling (1976).
Agency costs. Sum of:
- Monitoring. Principal observing the agent and keeping a record of their behavior.
Intervening in various ways to constraint agent.
- Bonding costs. Costs incurred by agent in order to signal credibly to the principal that she
will act in the interest of the principal. (Buying shares for example)
- Residual loss.
Two forms of agency problems
- Perquisites. Consumption by the management, benefit: accrue to the management, cost:
borne by the shareholders.
- Empire building. Free cash flow problem. Management pursuing growth rather than
shareholder maximization. Managers investing in negative NPV projects: destroying
shareholder value. Size of firm is related to CEO pay.
Most firms have a dominant shareholder.
Two different types of shareholders:
- Controlling shareholders
- Minority shareholders
Expropriation of minority shareholders.
- Tunnelling: asset sales. Large shareholder can expropriate gains. It has power.
- Transfer pricing: overcharging for the services and products.
- Nepotism: appointing family members to top management positions. Managerial
entrenchment: protecting against hostile takeovers and internal disciplinary actions.
- Infighting: Fight among the large shareholders, typically between family members.
Leveraging control and increasing the potential for expropriation. Different levels of firms. Dilute the
dollar stake, while still maintaining full control over investment strategies.
,Lecture 3
Dall-e
Openai.com/dall-e-2
Residual loss: differences between corporate decisions between owner-manager
After hiring someone it’s hard to monitor them whether they are really a ‘good’ CEO. Do they have
the right incentives to be one?
Adverse selection problem: we cannot distinguish good from bad managers beforehand. But is not a
moral hazard problem.
If CEO is active in M&A and the incentives are aligned: positive share price response.
A negative response means the shareholders ‘hate’ what the CEO is doing.
- Insufficient effort: target was not carefully chosen, no proper due diligence and price
negotiations.
- ..
Accounting manipulation cannot trigger negative share price response, rather trigger negative
permanent level of prices.
Tunneling somewhat illegal: manager should take all shareholders into account and not only
majority.
Often used to avoid paying taxes.
Tunnelling requires existence of minority shareholders who share the loss
Why do we care about if CEOs are paid for ‘luck’?
- Does not say anything about their abilities.
Does firm value depend on the effort of the CEO? Then you care about the CEO pay.
Skimming: CEO takes control of the compensation-setting process, and can set their own pay. How?
- Entranchement: packing board with supporters
- Complexity of the pay process
Paper
Oil price fluctuates a lot. CEO pay moves alike most of the time.
The only few times they don’t: oil prices are going down a lot! And pay goes up.
Kinds of luck:
Movement in exchange rates
Mean industry profitability
2SLS: 2-stage least squares
Performance can be determined by luck.
That regression is used to predict performance, strip anything else and use only performance from
luck.
Pay to performance: replace observed performance by performance driven by luck.
Accounting rate (performance) on pay.
Performance based on luck: 3x larger.
, Pay to luck becomes stronger when we look at instrumental variable.
There’s a correlation between pay and luck: luck plays a role.
Exchange rates: we observe the same.
CEOs can increase both cash component and performance based component in times of good luck.
CEO rewarded at least as much for a lucky dollar as for a regular dollar.
How to measure governance?
- Dummy capturing large shareholders
- If these are on the board
- Board size
- Fraction of insiders on the board
(More insiders = less monitoring)
Good corporate governance weakens pay for luck.
Not optimal for shareholders.
10-35%:
Compare magnitude of -1.48 against 4.49 in the Governance measure table (slide 5/6)
Mandatory group assignment:
About topics we will get in class, not yet so maybe smart to wait a little.
Read 3 websites: starting material.
Pick a casestudy that you like.
Record your presentation of main findings.
2 main questions: little parts within easy to divide.
1: 4-6 pages
2: 2 pages
Maximum of 8 pages.
Event study on case study.
