Fall2011Hughes408 - M ARKET D ISCIPLINE E CONOMICS 4 08...

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M ARKET D ISCIPLINE ECONOMICS 408 F ALL 2011 P ROFESSOR J. P. H UGHES OFFICE HOURS MON. 10:15 - 11:45, WED. 11:15 - 11:45/ NJ HALL 420 [email protected] Prerequisites: 220:203 or 320 (Intermediate Microeconomic Analysis) and 220:322 (Econometrics); This is an upper-level economics elective. Reference Text (optional): Corporate Governance , Robert A. G. Monks and Nell Minow, Blackwell Publishing, third edition (paperback), 2004 or fourth edition (paperback), 2008. Required Daily Reading: Wall Street Journal Course Description: Theories and evidence of the effect of agency problems on the economic performance of firms and on the role of internal mechanisms (board of directors, managerial compensation, and financing) as well as external forces (product markets, capital markets, and labor markets) in disciplining managerial inefficiency at for-profit and not-for-profit organizations, mutuals, and cooperatives. Background : The separation of management from ownership plus the outside owners’ lack of information about how a firm’s managers run the firm give managers discretion to pursue objectives that reduce the market value of their firm. These objectives include consuming perquisites, avoiding effort, building empires, discriminating prejudicially, making incompetent investment and production decisions, and taking too much or too little risk to protect their control over the firm’s assets. As Adam Smith noted in the Wealth of Nations , “The directors of such companies, however, being the managers rather of other people’s money than their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private company frequently watch over their own. Like stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honour, and very easily give themselves dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.” The enduring success of the corporate form of business organization stands in contrast to Adam Smith’s pessimism. Is it possible that the Invisible Hand of markets disciplines managers tempted by negligence and profusion (extravagance)? • Do product markets punish bad managers with weak demand for their products? • Does weak performance that causes a firm’s market value to fall below its potential value attract the attention of outsiders who try to take over the firm or to purchase a sufficiently large block of shares that they acquire the power to replace bad management and increase the firm’s value? • Does a firm’s weak performance erode the reputation of its managers and reduce their ability to compete in managerial labor markets? • Does the board of directors pay attention to the potential for negligence and profusion – perhaps
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This note was uploaded on 10/23/2011 for the course ECONOMICS 408 taught by Professor Hughes,j during the Spring '11 term at Rutgers.

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Fall2011Hughes408 - M ARKET D ISCIPLINE E CONOMICS 4 08...

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