Chapter8 - Financial Structure and Moral Hazard Chapter 8...

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Financial Structure and Moral Hazard Chapter 8
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Nat Springer sprinn@rpi.edu Sage 3602 (the Annex) Office Hours Monday 12:00-2:00 Thursday 12:00-2:00 By appointment
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Overview In equity contacts (stocks) Principal-agent problem Asymmetric Information Solutions In debt markets (bonds) Moral hazard Solutions
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Eight Great Puzzles Stocks only 9.2% of external funding Bonds only 35.5% of external funding Bank loans 55.3% of external funding Only large, est. firms have access to securities market Collateral req’d for most debt contracts Debt contracts are complicated and lengthy 5% of investment is direct between saver/investor Highly regulated financial system
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Principal Agent Problem Separation of owners from managers: agent (manager) acts in own interest, not in interest the interest of the of the principal (stockholder) - ‘Play’ with other people’s money - Not pursue profit maximization - Failure to modernize, satisfied with status quo - No incentive to work ‘too hard’ - Spend on unnecessary things - High personal salaries - Embezzlement
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I know what you don’t know… Managers have control over information Monitor their own activities (accounting, work hours,
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This note was uploaded on 04/07/2008 for the course ECON 4130 taught by Professor Springer during the Spring '08 term at Rensselaer Polytechnic Institute.

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Chapter8 - Financial Structure and Moral Hazard Chapter 8...

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