02_OverheadsForWeb3 - Obje s for today ctive Discussion -...

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ACCY 302 (Chen) Class 02 1 Objectives for today Discussion - Options Agency theory the players the conflict and resulting "agency problems" easing agency problems potential solutions further examine benefits & costs of incentive contracts as a solution link between agency problems, agency costs, & accounting
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ACCY 302 (Chen) Class 02 2 Discussion Options: The good, the bad, and the ugly?
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ACCY 302 (Chen) Class 02 3 Who bears the cost of bad decisions? Assume a company's earnings per share is $1.50 A manager holds 500,000 options, so her share of net income (before leasing a condo) is: 500,000 x $1.50 = $750,000 If the manager leases the $3,000,000 condo, the company's earnings per share will go down to $1.49 And the manager's new share of net income is: 500,000 x $1.49 = $745,000
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ACCY 302 (Chen) Class 02 4 Agency theory The players: 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 " "
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ACCY 302 (Chen) Class 02 5 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
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ACCY 302 (Chen) Class 02 6 Agency theory (continued) Agency problem #1 - Adverse selection definition - an individual with private information extends an offer to a trading partner that affects the
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This note was uploaded on 09/25/2010 for the course ACCY 302 taught by Professor Chen during the Fall '09 term at University of Illinois at Urbana–Champaign.

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02_OverheadsForWeb3 - Obje s for today ctive Discussion -...

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