PAM_334_Fall_2008_Lecture_17

PAM_334_Fall_2008_Lecture_17 - PAM3340 Lecture17 Agenda:

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PAM 3340 Lecture 17 Agenda: Fama and Jensen on boards Insider trading
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Theory of Boards, Fama and  Jensen (con’t) In most partnerships, decision  management and decision control are  not separate Supports hypothesis However, in  large  professional  partnerships  ownership becomes  diffuse  Different people are RCs than are  making management decisions
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Theory of Boards, Fama and  Jensen (con’t) Scope for agency problems In large partnerships we see a board  structure evolve (i.e. “managing  partners”)  see separation of decision control from  decision management as management  and risk-bearing become more separate
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Theory of Boards, Fama and  Jensen (con’t) Aside: Since all residual claimants  (partners) are experts in the firm’s  activities, they have little need for  outside experts on the board
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Theory of Boards, Fama and  Jensen (con’t) Financial mutuals Many financial activities are organized as  mutuals (investment funds, insurance) Unusual in that residual claimants are also  customers (e.g. shareholders of mutual  fund) Here have separation of risk-bearing  (RC’s) and decision management
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Theory of Boards, Fama and  Jensen (con’t)  Prediction is will observe a board  structure Mutual funds do have boards of  directors But there are reasons why the boards of  mutuals are different Owners actually have direct control of  the firm’s assets
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 Theory of Boards, Fama and  Jensen (con’t) Owner/customers can redeem their RC 
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This document was uploaded on 10/26/2011 for the course PAM 3340 at Cornell.

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PAM_334_Fall_2008_Lecture_17 - PAM3340 Lecture17 Agenda:

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