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Lecture12 - 13 - agency moral hazard adverse selection


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Unformatted text preview: very high ownership in the firm may: – become under­diversified, and take too little risk – have too much power and pursue his own agenda Stock options may provide incentives for earnings management and even financial statement falsification Who sets CEO pay? 19 Other Ways to Mitigate Agency Problems Competition in the labor market Bank monitoring Monitoring by venture capitalists Monitoring by large shareholders, e.g. institutional investors Good corporate governance practices: – Smaller and more independent boards – Transparent accounting & information disclosure – Shareholder rights Higher leverage – reduces free cash flow available to managers – increases prob. of bankruptcy (managers want to avoid) Career or reputation concerns 20 Moral Hazard is Everywhere! Insurance: auto insurance reduces the costs to insured people who have accidents, making people less cautious when driving. Deductibles are part of incentive schemes. Banks: rescue operations carried out by governments or central banks encourage risky lending, as lenders know they will not take losse...
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