6. Deals with Incentive Problems
- Helps construct the kind of contracts that fulfill investors needs and cope with contingencies that a
contract my not explicitly take into account . For example, if a company’s operations are partly financed
with debt, the contract may stipulate that the firm’s managers act in the interest of the shareholders.
We will focus on the operations of Mature Financial Systems therefore considering the following capital
• Stock Markets
The main “secondary market” for corporate shares. Trade takes place between investors, corporations are
not involved. The primary market is the market into which these shares were originally issued by
corporations. The patters of share prices is summarized by stock price indexes such as
• Bond Markets
These are long term securities – government debt, corporate bonds. Usually, they give a promise to pay
(i) a series of coupons (interest) (ii) a lump sum at maturity (face value) at a future date. They are traded
• Money Markets
Facilitates the trade of short-term securities – T-bills, other s-t corporate/government loans (3,6,12
months), Certificates of Deposit (CD’s).
• Commodity Markets
Highly organized markets in; precious metals (gold, silver, platinum), industrial metals (lead, tin, zinc),
agricultural commodities (wheat, sugar, coffee), petrochemicals (oil, gasoline) – all traded in contracts for
delivery of the commodity at a future date – 30, 60, 90, 120 days, --- 1year out.
• Physical Asset Markets