MGEC40H3 Study Guide - Final Guide: Executive Compensation, Making Money, Nash Equilibrium

Economics for Management Studies
Course Code
Majid Aramand
Study Guide

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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
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
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