ADMN 3400H Lecture Notes - Lecture 10: Credit Rating Agency, Political Corruption, Investment Banking
30 Mar 2020
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Lecture 11 executive compensation and income inequality. Accountants and auditors: corrupted by consulting contracts. Boards of directors: can be controlled and captured by ceos, possible solution: two-tier boards. Investment banks (and their analysts: corrupted by high fees, bonuses and too big to fail . Credit rating agencies: corrupted by conflict of interest. Share prices are based on expectations of future earnings, not current value of firm. Ceo learn to manage expectations instead of increasing firm value. Seperated between three parties shareholders (owners), the board of directors (represent the owners), and executives (managers). Monitoring: e. g. , board of directors, large block ownership. Incentives: ties the executive"s wealth of shareholders so that everyone shares the same goal (aligning goals). Two solutions monitoring and incentives: agency, shirking, hiring friends, not taking risks, perks, empire building. Stock options: most common, contract that allows executives to buy shares of stock at fixed price, called exercise or strike price, usually exercise the options to buy the stock.
