PAM_334_Fall_2008_Lecture_3 - PAM3340 Lecture3...

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PAM 3340 Lecture 3 Announcements: Prelim #1 Oct. 2 nd Agenda Definition of the corporation Costs of the corporate form Types of agency costs Mechanisms to control agency costs Benefits of corporate form
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Recall: Law does not equal legislation Firm types  compete and evolve Firm types are defined by  nature of  residual claims  ( i.e.  prop rts.) and  contractual arrangements Corporations have tradable/alienable  RCs
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Property Rights Arrangements: Some terms Residual claims : Property rights to the  net cash flows  of an organization Residual claimants : The  individuals   who hold property rights to the net cash  flows of an organization Property rights to any organization (and  thus to the firm itself) are defined by the  nature of its residual claims
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A Corporation’s Residual  Claims The residual claims (RCs) of the corporation  have a unique attribute The residual claim, or property right to the  net cash flow, is fully  alienable, tradable, or  transferable (and hence open) This is the unique aspect of the corporate  form That key attribute has implications
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Implications of  Tradable  RCs For example owner need have  no other  role  in the firm except ownership ( i.e no  management  role)   Residual claims can be traded at low 
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PAM_334_Fall_2008_Lecture_3 - PAM3340 Lecture3...

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