Lesson7 - Lesson7:UnderstandingFinancial Contracts In this...

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Lesson 7: Understanding Financial  Contracts In this lesson we will learn about the relationship between types of financial contracts and the characteristics of the business environment, including business size and cultural background. Suggested reading: RSU chapters 14 and 16
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The Problems “to be solved” Asymmetric information Adverse selection • used cars • bank loans stockholder-lender conflict : firm owners have an incentive to understate their true riskiness in order to borrow on more favorable terms • management manager-stockholder conflict: selecting a bad partner. Moral hazard • insurance • bank loans stockholder-lender conflict : firms (managers and owners) have an incentive to become riskier after their loans are funded (limited liability) management manager-stockholder conflict: ownership versus control – different incentives, ambiguous information (when is the CEO really wasting time?) - principal-agent
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Defining Dimensions Small, medium and large businesses Size influences the type of financing appropriate and available for a business Markets-oriented versus banking-oriented systems. Banking-oriented
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Lesson7 - Lesson7:UnderstandingFinancial Contracts In this...

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