PAM_334_Fall_2008_Lecture_10 - PAM3340 Lecture10 Agenda:

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PAM 3340 Lecture 10 Agenda: Business judgment rule: Judges incentives Institutional investors
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Recap Incomplete contracts: all contracts are  incomplete due to costly contracting Gives rise to  implicit contractual terms Are aspects of CEO contract that make them  self-enforcing  (e.g. repeated nature of  transaction) Business Judgment Rule: rule that has  evolved over time to protect managers from  risk of bad decisions
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Judges’ Incentives and the  Business Judgment Rule The BJR effectively substitutes  manager’s judgment for that of courts  and judges BJR   judges, with hindsight, do not  “second guess” managers Presumption is in favor of manager’s  judgment
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Judges’ Incentives and the  Business Judgment Rule (con’t) Is this a good idea? Consider judges versus managers’  incentives
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Institutional Investors (I.I.)  II’s are large investors that have a  fiduciary  duty  to invest on behalf of a group of  individuals:  They hold assets in trust for that group  They  must  act in that group’s interest  I.I. vote proxies for companies it owns
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I.I. (con’t) Institutional investors are large enough to 
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PAM_334_Fall_2008_Lecture_10 - PAM3340 Lecture10 Agenda:

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