Peng Inst Chapter 16 REVISED (2nd Edition)

Peng Inst Chapter 16 REVISED (2nd Edition) - Peng Global...

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Unformatted text preview: Peng Global Business 2e Chapter 16 Financing and Governing the Corporation Globally 1 LEARNING OBJECTIVES After studying this chapter, you should be able to: 1. Outline the two means of financing: equity and debt. 2. Differentiate among the various ownership patterns around the world. 3. Understand the role of managers in both principal-agent and principal-principal conflicts. 4. Explain the role of the board of directors. 5. Identify voice-based and exit-based governance mechanisms and their combination as a package. 6. Explain how governance mechanisms vary around the world. 7. Describe how institutions and resources affect corporate finance and governance. 8. Participate in two leading debates on corporate finance and governance. 9. Draw implications for action. 2 FINANCING DECISIONS External sources of financing: 1. Equity issued as a means to raise capital. Dividend payments (the cost of equity capital) are at managements discretion. 2. Debt a loan in the form of a bond. Interest payments (the cost of bond capital) are not at managements discretion. Must pay bondholders otherwise will be in default (e.g., Dec. 2009 DP World defaulted on $29 million in debt). 3 4 OWNERS (Leg #1) Owners provide capital, bear risks, and own the firm. Three kinds of ownership exist: 1. Concentrated vs. diffused ownership 2. Family ownership 3. State ownership 5 Concentrated vs. Diffused Ownership Concentrated ownership and control - founders start up firms and completely own and control them on an individual or family basis. If the company wants to grow and needs more capital, will have to go public. Diffused ownership - publicly traded corporations owned by numerous small shareholders but none with a dominant level of control. About 80% listed US and 90% listed UK firms fall in this category. Separation of ownership and control in diffused ownership, there is dispersal of ownership among many small shareholders and control is largely concentrated in the hands of salaried, professional managers who own little (or no) equity. 6 Concentrated vs. Diffused Ownership Dispersed owners do not have the incentive or resources to keep a close eye on how the firm is run, and will sell stock if dissatisfied. In contrast, institutional investors (e.g., mutual and pension funds) closely monitor the firm and try to influence board and managerial actions (rather than selling stock). Outside the US and UK, there is very little separation of ownership and control. 7 Family Ownership Most large firms in continental Europe, Asia, Latin America,...
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Peng Inst Chapter 16 REVISED (2nd Edition) - Peng Global...

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