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ACCY304-15%20Contracting - Contracts Session15 March28,2011...

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Incentive Conflicts and  Contracts Session 15 March 28, 2011 1 Department of Accountancy University of Illinois at Urbana-Champaign
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2 Decision making within the firm Department of Accountancy University of Illinois at Urbana-Champaign Faulty assumption: the firm has one central manager  who acts to maximize the firm’s value Many decision makers within the firm Primary objectives of most decision makers is not  maximize firm value
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3 The firm Department of Accountancy University of Illinois at Urbana-Champaign The firm is a focal point for a set of contracts Stockholders The Firm Suppliers Bondholders Insurance providers Employees Labor unions Banks Customers
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4 Owner-manager conflicts Department of Accountancy University of Illinois at Urbana-Champaign Owner-manager conflicts are caused by: Choice of effort Perquisite taking Differential risk exposure Differential horizons Overinvestment
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