02_classnotes - Objectives for today Discussion - O i Di i...

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Objectives for today ± Discussion - Options ± Agency theory ± the players ± the conflict and resulting "agency problems" ± easing agency problems otential solutions ± potential solutions ± analyze benefits & costs ("agency costs") of solutions ± further examine benefits & costs of incentive contracts as a solution nk between agency problems agency costs ACCY 302 (Shin) Fall 2009, Class 02 1 ± link between agency problems, agency costs, & accounting
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Discussion Options: he good the bad and the ugly? The good, the bad, and the ugly? ACCY 302 (Shin) Fall 2009, Class 02 2
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Option Backdating ??? ACCY 302 (Shin) Fall 2009, Class 02 3
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WSJ: Jan 12, 2007 ± Regulators are looking into a falsely dated grant of 7.5 million options to Steve Jobs. ± Documents says Apple's board approved option grants with an exercise price of $18.30 on Oct. 9 2001 19, 2001 . ± Truth is that the final terms of the grant were t on ecember 18 2001 Apple shares were set on December 18, 2001 . Apple shares were trading at $21.01 on that date . In fact, such a special board meeting on Oct. 19 did NOT occur. ± Apple took a $20 million charge for the grant, reflecting the difference between the grant price nd the actual stock price on December 18 ACCY 302 (Shin) Fall 2009, Class 02 4 and the actual stock price on December 18.
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Agency theory The players: rganizational decisions are: Organizational decisions are: ± delegated to "agents" (i.e., managers) ± by the "principals" (usually shareholders or lenders), who want the agents to act on their behalf ± which creates a " " ACCY 302 (Shin) Fall 2009, Class 02 5
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Agency theory (continued) What conflict occurs because of this arrangement? ± Principals want agents to act on their behalf, but agents are REMMers with their own goals –we have ± Result? – Agency problems. .. – ...which arise because of information asymmetry ACCY 302 (Shin) Fall 2009, Class 02 6
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Example: CEO Excess Sorkin (2002) reports L. Dennis Kozlowski, Tyco s former CEO, ± Spent tens of millions of dollars of company money on ersonal items such as a $16 8 million apartment on Fifth personal items, such as a $16.8 million apartment on Fifth Avenue, plus $3 million in renovations and $11 million in furnishings -- and a $7 million apartment on Park Avenue for his former wife ±
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This note was uploaded on 08/30/2009 for the course ACCY 301 taught by Professor Keller during the Spring '08 term at University of Illinois at Urbana–Champaign.

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02_classnotes - Objectives for today Discussion - O i Di i...

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