2510184
Agency Problem
- How to define:
- How to solve it: improve managers incentive to maximize share price
- large shareholders enforces high leverage ratio
- to take advantage of debt-overhang problem in
order to (1) prevent overspending by managers
(2) reduce manager's discretion to make
investment decisions that reduce shareholder
value
- to take advantage of debt-overhang problem in
order to (1) prevent overspending by managers
(2) reduce manager's discretion to make
investment decisions that reduce shareholder
value
- private equity
- -substantial equity stakes
- expertise
- -substantial equity stakes
- expertise
- cash flow based compensation contract
- -not equity based: unfair for managers because factors affecting share price are
outside control - not earnings based: over-investment&manipulation - value based
management: value created by a particular business unit minus cost of capital
- -not equity based: unfair for managers because factors affecting share price are
outside control - not earnings based: over-investment&manipulation - value based
management: value created by a particular business unit minus cost of capital
- spin offs and carve outs
- spin off: make a business unit a independent firm, distributing its shares to exiting shareholders
- carve out: make a business unit a independent firm, by IPO
- spin off: make a business unit a independent firm, distributing its shares to exiting shareholders
- large shareholders enforces high leverage ratio
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