Lecture 1 Flashcards
(14 cards)
What is corporate governance?
Processes, structures, and mechanisms that influence the control and direction of corporations
What does corporate governance quality affect?
- Firm value
- Shareholder rights
What are the key theories regarding corporate governance?
- Agency theory
- Transaction cost economics
- Stakeholder theory
- Stewardship theory
- Resource dependence theory
- Institutional theory
Describe agency theory
Seperation of ownership and control
- Managers (the agents)
- Shareholders (principals)
What are residual control rights?
Rights to make any decision regarding an asset’s use
What are the main challenges of agency theory?
- Contract incompleteness: contracts can’t cover all future situations
- Information asymmetry: managers know more than investors, making monitoring and verification costly
… lead to agency problems?
Seperation of ownership and control
What is the transaction cost economics theory?
Firms need to minimize the costs of doing business
What does (Coase, 1937) state?
A firm is a governance structure to allocate resources more efficiently
What is the difference between stakeholder and shareholder theory?
Shareholder: profit for owners
Stakeholder: value for all stakeholders
Explain resource dependence theory
Keep relationship with stakeholders to ensure access to critical resources
Explain stewardship theory
Managers are naturally motivated to act in the best interest of the company.
What is the opposite of stewardship theory? And why?
Agency theory because it assumes managers don’t act in the best interest of the company
Explain the insitutional theory
Companies must adapt to societal norms to gain legitimacy
