ECMC40 - Exam Review

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Economics for Management Studies
Majid Aramand

ECMC40 - Exam Review 9) Separation of ownership and control, by Fama and Jensen Typically talk about big companies Divide it into shares Agency theory = separate management from ownership  Organization as nexus (connection/combination) of contracts, how to define the boundaries of the organization. registering a company is a form of contract, employees- contract etc. most are written, some verbal  Residual claims – The right of a shareholder or another party to the profit of a company after all prior obligations have been paid, who’s going to benefit  Residual claimants – The shareholders or another other person with the with right to the profit  Decision process – there is the initiation: generation of proposals for resource utilization and structuring of contracts, ratification: choice of the decision initiatives to be implemented, implementation: execution of ratified decisions, monitoring: measurement of the performance of decision agents and implementation of rewards  Decision management – initiation and implementation, from small decision to big who’s going to manage  Decision control – ratification and monitoring  Residual risk bearing - organizations in order to function need to take risk, and as entrepreneurial firm, the owner bares all the risk, but in bigger companies the question is who’s going to take that risk,  Separation of residual risk bearing from decision management leads to decision systems that separate decision management from decision control  Combination of decision management and decision control in a few agents leads to residual claims that are largely restricted to these agents  Open Corporation and control – most common type, managers are responsible to shareholders, company publishes a report and balance sheet, to member of public to evaluate how the firm functions, open to the public. a firm whose shares are publicly traded, and are not monopolized by a small group of investors o stocks/shares o stock markets o market for takeover o expert boards o board of directors – monitor decision, how risks are taken, don’t take risk o shareholders- don’t take risks o manager – takes risk, make decision  Professional partnership and control – business entity formed by two or more professionals such as accountants, doctors, or lawyers, who provide professional services to the public. no separation  Nonprofit organization and control – not meant for making profit, but it does do business. uft is a non profit but from a business point of view they are making money. no shareholders, they have trustees who oversee organization, there might be a couple of people who get paid who make management decisions but then have trustees who look at them . No residual claims 11) On the efficiency of internal and external control mechanisms, by Walsh and Seward Separate managers from the owners, most emphases are on improving the efficiency of the organization.  Owner’s interests in corporations: o 1. to earn maximum profit o 2. to distribute these profits generously and equably o 3. to maintain market condition  Manager’s interests in corporation: prestige, power, money How to make a bridge between these two  Internal control mechanisms: To bring the interests of the owners and managers together. To control the behaviour and performance of managers. o Management performance evaluation: the balance between effort and ability – low to high, how much they put in each, sometimes ability but no effort or vice versa, environment assessment: markets, industry, attribution decision – to attribute poor organizational performance to management o Internal control options: change the incentive – dismiss management, pay-for- performance, management turnover o Internal entrenchment practices: change the evaluation - change situation assessment (sometimes the assessment they use is not the right one because of no expertise so they hire another company with more expertise), alter performance (either too high or too low, so change the ‘bar’),change a person position from one department to another, neutralize internal control mechanisms (not tying the performance to pay in order to relax a little in order not to fill the pressure)  External control mechanisms: some of them they don’t’ have control over them, it can kick in when the company is not doing well, or when the company is looking for someone to acquire them o Market for corporate control: internal and external market (most are external) but when company is doing well there won’t be a market for external o Merger and acquisition (M&A): a form of corporate control (acquisition) if it’s acquired all the decision will be under the control of the one who acquired o Takeover: usually a hostile act of a firm who has a stronger position in the market and one who doesn’t, so the strong one offers and the company that is acquired is dissolved 12) Cooperation, opportunism, and invisible ha
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