PAM_334_Fall_2008_Lecture_9

PAM_334_Fall_2008_Lecture_9 - PAM3340 Lecture9...

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PAM 3340 Lecture 9 Prelim 1 Thursday Agenda: Economics of voting Fiduciary principles Business judgment rule Institutional investors
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Recap Managers’ risk incentives: could add golden  parachutes Voting: one-share one vote, goes with residual claim  Decision control and the bearing of costs/benefits of  decision linked Having multiple stakeholders with voting power would  be problematic Rationally ignorant voter: can be mitigated by block  holders Only hold vote when agency costs high
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The Firm’s Decision to Hold a  Vote What are the costs and benefits  to the  firm  of using the voting mechanism? Benefits: What is the quality of  information about preferences?  Costs?
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The Fiduciary Principle (FP) Directors and officers are the  “fiduciaries” of shareholders They must operate the firm in the  interest of shareholders They have a  duty of loyalty  and  duty of  care
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The Fiduciary Principle (con’t) “Fiduciary principles” are a broad set of  legal rules that restrict managerial  behavior Legal sanctions for violating These principles are the institutional  arrangements that set up the principal- agent relationship
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Corporate Form OWNERS (Stockholders) residual claimants    BOARD OF DIRECTORS (elected by proxy)
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PAM_334_Fall_2008_Lecture_9 - PAM3340 Lecture9...

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