BUS 312 Lecture Notes - Lecture 1: Agency Cost, Investment, Options Backdating

• School: Simon Fraser University
• Department: Business Administration
• Course: BUS 312
• Professor: Martin Thorsten

Document Summary

Role of the financial manager (1) cash raised from investors (1) (2) cash invested in firm (2) (3) cash generated by operations (3) (4a) cash reinvested (4a) (4b) cash returned to investors. Agency conflicts between managers and shareholders lead to agency costs shareholders want managers to maximize firm value. But difficult to monitor, especially when there are many shareholders. Not well monitored, managers might also follow their own interests, at the expense of shareholders. Agency costs take many forms: reduced effort, empire building, One example of perks : corporate jets. (yermack, d. 2006 flights of fancy: corporate jets, 1 - compensation plans if they are not manipulated (e. g. options backdating ) 2 - board of directors with independent board members (often executives, or ceos of other firms sit on the board) 3 takeovers if no anti-takeover provisions in the articles of incorporation (e. g. poison pills )