PAM_334_Fall_2008_Lecture_14

PAM_334_Fall_2008_Lecture_14 - PAM3340 Lecture14...

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PAM 3340 Lecture 14 Announcements: Prelim #2 next Tuesday Agenda: Jensen, “Takeovers: Causes and  Consequences” Agency costs of free cash flow Event study method Role of Board
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Agency Costs of Free Cash  Flows Free cash flow is cash flow  in excess of   that required to fund all of a firm’s  positive net present value projects  Free cash flows create severe agency  problems Problem is to get the firm to “disgorge”  free cash flows (i.e. to pay it out to  shareholders instead of wasting it) 
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Agency Costs of Free Cash  Flow Managers don’t want to pay out cash to  shareholders Role of debt in forcing managers to  disgorge free cash flow Role of takeovers in lowering free cash  flows Ex: Oil Industry
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Measuring the Effects of  Corporate Control Trans.  Assumption : Stock prices measure  investor’s expectations about the firm’s  future discounted payouts A change in the price of the stock  reflects a change in investor’s valuation  of the company (not perfectly, but the  best measure we have) Stock prices will be affected continuously by  all new info hitting the market
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Measuring the Effects of  Corporate Control Trans.  Company-specific news : New products,  new governance structures, new managers,  etc. Economy-wide news : Changes in interest  rates, Ben Bernanke’s statements, trade  agreements, wars, etc. Industry-wide news : e.g. regulations  affecting a specific industry
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Measuring the Effects of  Corporate Control Trans. Suppose we want to observe the effects 
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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_14 - PAM3340 Lecture14...

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