explain the principal agent problem briefly
Shareholder (owner of the firm):
Have capital, but do not have time to run company
Want firm run so as to maximize profits
CEO (Manager):
Has time and managerial skill; does not have capital to own the firm
Wants high compensation, career advancement
The Problem: Management takes self-interested actions that are not in the interest of shareholders
=> Agency Costs: Shareholders bear the cost of these actions
solution for the principal agency problem
If the CEO would own the company
corporate governance
set of mechanism that limit the conflicts of interest between managers and financiers
name 4 examples for agency costs
insufficient time and effort on building shareholder value
inflated compensation
manipulating financial results to increase bonus or stock price
excessive risk taking to increase short term results and bonus
What ist corporate governance
Collection of mechanisms to prevent self-interested managers from engaging in activities detrimental to the welfare of shareholders and stakeholders
Governance systems are not uniform across countries.
They are shaped by a variety of factors - name them
efficiency of local capital markets
how good the prices of stocks reflect available information
protection afforded by legal system (Legal Tradition)
how well laws protect shareholder / creditor rights
enforcement of regulations
how consistently laws are enforced
reliability of accounting standards
transparency of financial reporting
societal and cultural values
how much self interested managerial behavior is tolerated in regard to cultural norms
how does the product market competition affect the principal agency problems?
competition forces managers to use corporate resources efficiently
if they waste resources, they will be unable to compete
loses market shares
competition provides benchmark agaiinst which the quality of the firm and management can be assessed
=> but competition can never fully replace a proper governance
explain random errors
how is corporate governance regulated
binding laws and regulatory instruments
listing rules / security laws / listing rules / specific regulations
non-binding soft.law codes and principles
which types of Agency Problems exist?
AP1 - Shareholders vs. Manager
AP2 - controlling vs. non-controllinh shareholders
AP3 - shareholders vs. creditors
corporate governance consists of ……, but are influenced by a much broader group of constituents (name 5)
… board of directors to monitor and incentivize management
… external / internal auditors to ensure the reliability of the financial statements
influenced by:
media
analysts
creditors
investors
costumers
suppliers
competitors
explain the the corporate governance systems in germany
=> clear seperation between management (Vorstand) and supervision (Aufsichtsrat)
Board Systems
Two-Tier-System
Board Responsibilities:
Management Board (Vorstand)
Management Decisions
Supervisory Board (Aufsichtsrat)
Oversight of Management decisions
financial statement approval
+ Advisory
explain the the corporate governance systems in the USA
=> monitoring and decision making may overlap
One-Tier-System (Board of directors)
Board of directors:
oversight of “Executive Management”
senior management appointments
Compare these points between german and US corporate governanace:
Ownership
capital markets
executive compensation
bank / lender power
Germany:
concentrated (Families / Corporates)
relatively illiquid
paylevel: moderate
pay performance: moderate (mainly bonuses)
strong
USA:
dispered
very liquid
pay level: high
pay performance: high (bonuses / options / stocks)
minor
what are the fundamental drivers for CG quality and how does the CG quality affects on a firm level view and on a country level view
fundamental drivers:
firm level view
board quality
ownership structure
country level view
legal tradition
regulatory enforcement
affects:
firm value / financial performance
economic growth
name some implications for efficient capital markets in regard of CG
first way how capital market efficiency can affect CG:
prices correctly reflect risk and reward > improves decision making
prices are a precice of firms value
second way how capital market efficiency can affect CG:
by offering equity based incentives, the firm can align the interest of management and shareholders
two problems efficient markets protect against
adverse selection
private informationen exploited
risk of market breakdown
moral hazard
unobservable action
excessive risk-taking
a strong legal system mitigtaes agency problems, but why?
because self interested managers ex-ante know illegal actions will be punished
What is the intuition of regulatory enforcement
it signals that management is being monitored, which contributes to investors confidence that their interests will be protected
What comes with the reliability of accounting standards
provide credible and comparable infromatioen to investors via financial reports
reduce information asymmetry
implications of the reliability of accounting standards on CG
allows for more effective monitoring
improves incentive contracting
what does societal and culutra values have to do with CG
managerial behaviour is influenced by the society in which the company operates
explain the hofstede Model
the hostfede model categorizes cultural values:
power distance
individualism
masculinity
uncertainty avoidance
long term orientation
if a country lacks effiencient capital markets, legal protection, legal enforcement etc. other critical substitute - and non legal mechanisms take its place. Companies then rely on alternative sources of financing for growth: name them
influential wealthy families
large banking institutions
other companies
governments
name the two shareholder types and the categories in those types
controlled (shareholder who holds <20% of the voting rights)
family / individual control
government control
private control
listed-firm control
widely held (no controlling shareholder, but can have a blockholder with >5% of voting rights)
with blockholder
without blockholder
key take aways of LLSV
LLSV zeigt, dass der Schutz von Aktionären und Gläubigern maßgeblich durch das Rechtssystem eines Landes geprägt wird — insbesondere durch dessen Rechtstradition (Legal Origin: Common Law vs. Civil Law, v. a. englischer vs. französischer Ursprung), die historisch bedingt und sehr beständig ist. Ein stärkerer rechtlicher Schutz führt wiederum zu größeren, entwickelteren Kapitalmärkten. Zudem ist nicht nur das Gesetz selbst, sondern auch das Enforcement, also die tatsächliche Durchsetzung dessen, ausschlaggebend.
Last changed11 days ago
