ADMS 1000 Chapter : The Structure of Corporations [Reading] [P2]
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Corporate ownership and control are divided between two parties stockholders and officers: the stockholders own the firm and officers (or executives) control the firm. There is a problem with this separation of ownership and control: it is not far-fetched to imagine that managers may act in their personal interest if possible, even at the expense of owners. the bouncer may pocket some of the cash if he thinks no one is looking and try to maximize his own wealth at the expense of the owner. if the owner cannot effectively monitor the transactions and the activities of the bouncer, he or she should lose money. therefore, monitoring is important to help overcome the agency problem. Solutions to this problem tend to come in two categories, incentives and monitoring: incentives to tie the wealth of the executive to the wealth of the shareholders, so that executives and shareholders want the same thing.