What does ownership refer to in the context of a company?
Holding shares
Ownership refers to holding shares in a company, entitling owners to profits and a share of assets
Control refers to the authority to make decisions and manage the company.
What is a common conflict between owners and managers?
Profit vs. growth
The divorce of ownership from control emerged during the Industrial Revolution.
The separation of ownership and control allowed for greater capital investment and specialization.
Arrange the following periods in chronological order:
1️⃣ Industrial Revolution
2️⃣ Early 20th Century
3️⃣ Modern Era
The divorce of ownership from control created a potential conflict of interest, as owners sought higher profits while managers often prioritized growth or personal benefits
What is a key characteristic of firms with divorced ownership and control regarding shareholders?
Numerous shareholders
The agency problem in firms with divorced ownership arises because managers may pursue their self-interests instead of shareholder objectives.
What is the primary goal of owners in a company with divorced ownership?
Maximizing profits
Managers may prioritize personal career advancement over shareholder value.
What mechanisms are used to align management behavior with owner interests?
Audits, oversight, compensation schemes
The agency problem is high in firms with unified ownership and control.
False
Owners typically prioritize maximizing profits
Why do owners often prefer less risky investments?
To protect their capital
Managers often focus on short-term gains to boost performance metrics.
Ownership refers to holding shares entitling owners to profits
What does 'control' in a company context refer to?
Authority to make decisions
The divorce of ownership from control began during the Industrial Revolution.
The divorce of ownership from control allowed for greater capital investment and specialization
What is a key characteristic of firms with divorced ownership and control?
Large number of shareholders
Firms with unified ownership and control have a low risk of agency problems.
Managers often focus on growth, market share, or personal career advancement
Why might managers prioritize growth over profit maximization?
To increase market share
The principal-agent problem arises when goals and interests of the principal and agent do not align.
One cause of the principal-agent problem is information asymmetry
What does 'moral hazard' refer to in the principal-agent problem?
Hidden actions harming the principal
Performance-based compensation is a strategy to mitigate the principal-agent problem.
Moral hazard occurs when agents take hidden actions that may harm the principal
Adverse selection arises when principals hire agents with hidden attributes that undermine performance.
What is an example of a moral hazard scenario?
CEO investing in pet projects
Principals typically focus on long-term objectives, while agents may prioritize short-term gains.
The principal-agent problem arises when the goals of the principal and agent do not align
Information asymmetry allows agents to act in their own interest
What is one strategy to mitigate the principal-agent problem?
Performance-based compensation
Corporate governance mechanisms are designed to align the interests of shareholders and managers.
Executive compensation schemes tie manager pay to company performance
What is the divorce of ownership from control?
Separation of ownership and management
The divorce of ownership from control can lead to agency problems.