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
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
– 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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- Spring '13
- Information asymmetry, Adverse selection