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What are the 4 agency problems that are manifest in family firms?

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  1. Shareholders versus managers
  2. Controlling (family) shareholders versus noncontrolling shareholders
  3. Shareholders versus creditors
  4. Family shareholders and family at large
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Are individual and family shareholders likely to be more dedicated principals and more effective than other types of controlling shareholders?

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Yes, because their own wealth is at stake. In contrast, other types of concentrated owners such as the state, banks, corporations, pr other institutions are only agents for their respective superprincipals, which dilutes their incentives to monitor the manager.

Also, founding families are particularly likely to be dedicated and effective owners because their emotional ties to the firm give them additional motivation.

In most family firms, the conflict may be further attenuated or even eliminated by the fact that managers are significant owners themselves, or at least members of the controlling owner's family. (Family management)

However, the agency benefits of family management have to be traded off against its costs if family managers owe their jobs to sheer nepotism.

Evidence suggests that the overall impact on performance is positive. However, the net effect of descendant CEOs on performance is negative when institutional efficiency is high but positive when institutional efficiency is low.

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TESTE DEIN WISSEN

Does the agency problem between the controlling family owner and the noncontrolling shareholders overshadow the agency problem between the owners and managers in family firms?

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Yes, five of the arising conflicts of interest are: 


    1. Families' presence in management further reinforces their ownership and voting control. This eliminates the agency problem between the owners and the shareholders, but it can also be seen as further enhancing the conflict between the controlling family owner and the noncontrolling shareholders, particularly if the family manager owes his or her job to sheer nepotism.
    2. Difference or ratio between voting control and economic ownership leading to higher voting or board control.
  1. Control premium, the block premium paid for controlling block of shares, relative to the price paid in minority trades, suggests evidence of agency problem between the controlling family owner and the noncontrolling shareholders. 
  2. Studies find that the wedge between cash-flow and control rights has a negative impact on value.
  3. Transfer of assets and profits out of the firm for the benefit of those who control the firm.
  4. Entire industries or a large fraction of some of them are family-controlled. Countries with a high incidence of family control over large firms have low compliance with tax laws, high official corruption, low judicial efficiency and integrity, inefficient bureaucrats with low autonomy, and high regulatory barriers to entry.
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TESTE DEIN WISSEN

What are 2 possible conflicts of interest that can occur between shareholders and creditors in family firms?

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TESTE DEIN WISSEN
  1. Asset substitution or risk-shifting effect
  2. Underinvestment from debt overhang


Family objectives such as ensuring long-term survival, preserving the family's reputation, keeping the firm in the family, and the undiversified nature of their holdings make controlling families more likely to maximize firm value rather than shareholder value. Founding family ownership is associated with a significantly lower cost of debt.

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TESTE DEIN WISSEN

What is corporate governance?

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The reconciliation of conflicts between various claim holders.

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TESTE DEIN WISSEN

What are the main three issues in the agency problem?

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1. Divergence of interest (The agent dislikes effort)

2. Information asymmetries (The principal cannot observe actions of the agent)

3. Inability to write complete contracts (Actions of the agent are not enforceable)

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TESTE DEIN WISSEN

How can agency cost impact firm value?

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TESTE DEIN WISSEN

Direct by reducing the cash flows for investors due to:

• suboptimal risk-sharing

• suboptimal investment decisions

• tunneling or even theft

• costs of internal monitoring and controlling activities (activities of the supervisory board, but also hiring a rating agency to signal creditworthiness)

Indirect through higher cost of capital due to:

• external monitoring activities (done by shareholders)

• the inability to attract “cheap” outside capital

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TESTE DEIN WISSEN

Who are the interested parties in CG?

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TESTE DEIN WISSEN

Investors:

- Identifying possible corporate governance problems

- Understanding the trade-offs of governance mechanisms

Managers and other key employees:

- Identifying different interest groups within and outside the firm

- Understanding the trade-offs of governance mechanisms

- Identifying governance issues in other firms (clients, suppliers)

Regulator:

- Understanding the trade-offs of governance mechanisms

- Addressing market failures

- Anticipating potential problems of regulatory initiatives

Interested observers:

- Understanding the functioning of firms, the role of incentives, information

- Understanding the concept of agency, moral hazard, information asymmetry for other internal and external relationships, and the role of motivation (incentives) and supervision (see Filatotchev and Nakajima,

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TESTE DEIN WISSEN

What is meant by the informative principle?

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TESTE DEIN WISSEN

Any signal that reveals information of the agent's effort should be included in the contract, i.e. use precise signals, such as relative performance

Lösung ausblenden
TESTE DEIN WISSEN

What is another way then using signals to measure the effort of an agent?

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TESTE DEIN WISSEN

Another way to provide additional information on agent’s effort is to monitor her activities (i.e. quality controls, audits, time control)

Monitoring reduces the value of the variance Var(Ɵ) but also entails additional costs

Monitoring intensity principle: When the plan is to make the agent’s pay very sensitive to performance, it will pay to measure that performance carefully (in order to reduce the error)

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TESTE DEIN WISSEN

What is the difference between the agency theory and the behavioral agency theory?

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TESTE DEIN WISSEN

While the agency theory proposes a linear relationship between rewards and effort, behavioral agency theory proposes a more complex pay-effort function, which is affected by loss, risk, hyperbolic discounting of deferred rewards, inequity aversion and intrinsic and extrinsic motivation (Pepper and Gore, 2012)


The agents will perform when they have the ability, motivation and opportunity

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TESTE DEIN WISSEN

What does the conventional agency theory ignore?

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TESTE DEIN WISSEN

It ignores that agents might be more motivated when presented with clear goals and valuable feedback.

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Q:

What are the 4 agency problems that are manifest in family firms?

A:
  1. Shareholders versus managers
  2. Controlling (family) shareholders versus noncontrolling shareholders
  3. Shareholders versus creditors
  4. Family shareholders and family at large
Q:

Are individual and family shareholders likely to be more dedicated principals and more effective than other types of controlling shareholders?

A:

Yes, because their own wealth is at stake. In contrast, other types of concentrated owners such as the state, banks, corporations, pr other institutions are only agents for their respective superprincipals, which dilutes their incentives to monitor the manager.

Also, founding families are particularly likely to be dedicated and effective owners because their emotional ties to the firm give them additional motivation.

In most family firms, the conflict may be further attenuated or even eliminated by the fact that managers are significant owners themselves, or at least members of the controlling owner's family. (Family management)

However, the agency benefits of family management have to be traded off against its costs if family managers owe their jobs to sheer nepotism.

Evidence suggests that the overall impact on performance is positive. However, the net effect of descendant CEOs on performance is negative when institutional efficiency is high but positive when institutional efficiency is low.

Q:

Does the agency problem between the controlling family owner and the noncontrolling shareholders overshadow the agency problem between the owners and managers in family firms?

A:

Yes, five of the arising conflicts of interest are: 


    1. Families' presence in management further reinforces their ownership and voting control. This eliminates the agency problem between the owners and the shareholders, but it can also be seen as further enhancing the conflict between the controlling family owner and the noncontrolling shareholders, particularly if the family manager owes his or her job to sheer nepotism.
    2. Difference or ratio between voting control and economic ownership leading to higher voting or board control.
  1. Control premium, the block premium paid for controlling block of shares, relative to the price paid in minority trades, suggests evidence of agency problem between the controlling family owner and the noncontrolling shareholders. 
  2. Studies find that the wedge between cash-flow and control rights has a negative impact on value.
  3. Transfer of assets and profits out of the firm for the benefit of those who control the firm.
  4. Entire industries or a large fraction of some of them are family-controlled. Countries with a high incidence of family control over large firms have low compliance with tax laws, high official corruption, low judicial efficiency and integrity, inefficient bureaucrats with low autonomy, and high regulatory barriers to entry.
Q:

What are 2 possible conflicts of interest that can occur between shareholders and creditors in family firms?

A:
  1. Asset substitution or risk-shifting effect
  2. Underinvestment from debt overhang


Family objectives such as ensuring long-term survival, preserving the family's reputation, keeping the firm in the family, and the undiversified nature of their holdings make controlling families more likely to maximize firm value rather than shareholder value. Founding family ownership is associated with a significantly lower cost of debt.

Q:

What is corporate governance?

A:

The reconciliation of conflicts between various claim holders.

Mehr Karteikarten anzeigen
Q:

What are the main three issues in the agency problem?

A:

1. Divergence of interest (The agent dislikes effort)

2. Information asymmetries (The principal cannot observe actions of the agent)

3. Inability to write complete contracts (Actions of the agent are not enforceable)

Q:

How can agency cost impact firm value?

A:

Direct by reducing the cash flows for investors due to:

• suboptimal risk-sharing

• suboptimal investment decisions

• tunneling or even theft

• costs of internal monitoring and controlling activities (activities of the supervisory board, but also hiring a rating agency to signal creditworthiness)

Indirect through higher cost of capital due to:

• external monitoring activities (done by shareholders)

• the inability to attract “cheap” outside capital

Q:

Who are the interested parties in CG?

A:

Investors:

- Identifying possible corporate governance problems

- Understanding the trade-offs of governance mechanisms

Managers and other key employees:

- Identifying different interest groups within and outside the firm

- Understanding the trade-offs of governance mechanisms

- Identifying governance issues in other firms (clients, suppliers)

Regulator:

- Understanding the trade-offs of governance mechanisms

- Addressing market failures

- Anticipating potential problems of regulatory initiatives

Interested observers:

- Understanding the functioning of firms, the role of incentives, information

- Understanding the concept of agency, moral hazard, information asymmetry for other internal and external relationships, and the role of motivation (incentives) and supervision (see Filatotchev and Nakajima,

Q:

What is meant by the informative principle?

A:

Any signal that reveals information of the agent's effort should be included in the contract, i.e. use precise signals, such as relative performance

Q:

What is another way then using signals to measure the effort of an agent?

A:

Another way to provide additional information on agent’s effort is to monitor her activities (i.e. quality controls, audits, time control)

Monitoring reduces the value of the variance Var(Ɵ) but also entails additional costs

Monitoring intensity principle: When the plan is to make the agent’s pay very sensitive to performance, it will pay to measure that performance carefully (in order to reduce the error)

Q:

What is the difference between the agency theory and the behavioral agency theory?

A:

While the agency theory proposes a linear relationship between rewards and effort, behavioral agency theory proposes a more complex pay-effort function, which is affected by loss, risk, hyperbolic discounting of deferred rewards, inequity aversion and intrinsic and extrinsic motivation (Pepper and Gore, 2012)


The agents will perform when they have the ability, motivation and opportunity

Q:

What does the conventional agency theory ignore?

A:

It ignores that agents might be more motivated when presented with clear goals and valuable feedback.

Firm Theory and Corporate Governance

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The Theory of the firm as governance structure: from choice to contract - Williamson


The paper tries to illustrate that it is easier to say that organisation matters than it is to show how and why. 


The sciences of choice and contract:

-classic economics approach looks at human behavior as a relationship between ends and scarce means

-consumers maximise utility and firms maximise profit

-persons seek to secure collectively their own privately defined objectives that cannot be efficiently secured through simple market exchanges

-science of choice (scarcity & resource allocation) vs. science of contract (incentive alignment and governance)


Organisation theory through the lens of contract:

-first lesson is to describe human actors in more realistic terms

-bounded rationality is the cognitive assumption by which behavior is intendently rational but only limitedly so (maximising is achieved through satsficing, or a quest for an alternative that is "good enough")

-all contracts are unavoidably incomplete

-private ordering: efforts to craft governance structure supports for contractual relations during the contract implementation interval

-efforts by bosses to impose controls on workers have both intended and unintended consequences

-each mode of governance possesses distinctive strengths and weaknesses

-transactions should be aligned with appropriate governance structures

-importance of cooperative adaptation: adjust spontaneously to changes in the market, mainly as signaled by changes in relative prices


-the larger the organisation, the more controls are required (incentives are weaker in integrated firms and controls are more extensive)

-the authors advise to try in most areas to incentivise other people without contracts, rather you should rely on cooperation


The theory of the firm as governance structure:

-organisational structure mainly arises in the service of economising on transaction costs

-some transactions in intermediate product markets avoid some of the more serious conditions of asymmetry-of information, budget, legal talent, risk aversion and the like-and so some transactions are transferred to final product markets 


The science of choice approach to the make-or-buy decision:

-vertical integration might arise as a means by which to relieve bargaining over the indeterminacy

-why don't firms integrate everything?


Coase and the make-or-buy decision:

-Coase appealed to transaction costs economising as the hitherto missing factor for explaining why markets were used in some cases and hierarchy in other cases

-there is a cost of using the price mechanism; internal procurement by the firm avoids the cost of price discovery

-internal supply avoids the need to consult the market about prices

-but the price discovery burden that Coase ascribes to the market does not survive comparative institutional scrutiny  (because incentives within a firm are weaker, ready access to the pass-through of costs can encourage cost excesses)


A heuristic model of firm as governance structure:

-governance is the means to mutual gain from voluntary exchange


The contractual schema:

-added bureaucratic costs accrue upon taking a transaction out of the market and organising it internally, internal organisation is usefully thought of as the organisation form of last resort (recourse to the firm only when all else fails)


Relations with sources of finance:

-board of directors is interpreted as a security feature that arises in support of the contract for equity finance

-debt is a governance structure that works almost entirely out of a set of rules: 1) stipulated interest payments, 2)liquidity tests, 3) principal will be repaid at loan-expiration date, 4) in the event of default, the debtholders will exercise preemptive claims against the assets in question. Debt is unforgiving if things go poorly

-board of directors is awarded to the holders of equity so as to reduce the cost of capital


Property rights theory:

-it disputes all four of the following propositions of transaction cost economics:

1) that firms enjoy advantages over markets in cooperative adaptation respects, 2) that incentive intensity is unavoidably compromised by internal organisation, 3) that administrative controls are more numerous and more nuanced in firms, 4) that the implicit contract law of internal organisation is that of forbearance, when the is its own court for resolving dispute

-transaction costs economics also recognises that accounting is not fully objective but can be used as a strategic instrument


Conclusion:

-human actors are described by cognitive traits and self-interestedness

-organisation matters for dealing with issues of conflict, mutuality and order

-transactions which differ in their attributes are aligned with governance structures

-in contrast to classical neo economic theory, seeing through the lens of contracts and transaction costs opens up the black box of public policymaking and explains how decisions are actually made

-transaction cost economics is sometimes also translated and renamed to incompletet contract theory


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