lec3 (without solutions) - Econ 138 Financial and...

Info iconThis preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon
Econ 138 Financial and Behavioral Economics Lecture 3 : Why MM Doesn’t Hold Moral Hazard (Principal Agent) Problems Ulrike Malmendier UC Berkeley Tu, January 29, 2008
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Organizational Items Check out the updated syllabus! ( Show lecture 4. ) Welch provides ‘general background.’ Tirole is closest to what we are doing — but if you work with it, there might be many references and remarks you do not understand. Don’t worry! As long as you understand the class notes, you are doing great! Homework 1 will be posted later today. For next class, read my paper ‘Financial Expertise of Directors’ (joint with B. Guner and G. Tate), Journal of Financial Economics ,fo rthcom ing .
Background image of page 2
You only need to read the abstract, the introduction and Section 5. You only need to understand the abstract and pp. 1-4 and 30-31. Glancing over the rest of the paper gives you some idea of quite typical Corporate Finance research related to ‘misaligned incentives’ (today’s topic) looks like.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
1 Motivation A key assumption underlying the MM Theorem: The choice of investment projects (and hence the total value/NPV of the f rm) is independent of the choice of f nancing. For example: Managers (CEOs) pick investment projects that maximize the owners’ wealth (shareholder value). In reality: 1. Managers may not pick shareholder-value maximizing projects. And: 2. How much they deviate may depend on the available f nancing sources.
Background image of page 4
Reasons for (1.), managers not maximizing shareholder value: Managers’ interests may di f er from owners’ interests because of Disutility / cost of e f ort (laziness) Private bene f ts (perks such as expensive o ces) Utility from having a larg f rm = “empire building” Entrenchment (managers want to keep their job and choose investments that make them indispensable) Risk-aversion (manager chooses projects with lower NPV but lower down- side if that helps to prevent them from being f red)
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/02/2008 for the course ECON 138 taught by Professor Malmendier during the Spring '08 term at University of California, Berkeley.

Page1 / 17

lec3 (without solutions) - Econ 138 Financial and...

This preview shows document pages 1 - 6. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online