No outside input ot than the offer itself is required

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“kick in the pants”. No outside input other than the offer itself is required for the upward revaluation. SIGNALING 1. Signaling as per “Spence” is in connection with labor market: • Signaling states that particular actions may convey other significant forms of information. • The level of education of a laborer was a signal not only of more training but of higher innate abilities as well. • Lower –quality labor could not attempt to fool the mkt by substantial outlays for obtaining more education and training.
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2. Signaling as per “Ross”- connection with capital structure decisions. • He postulates that managers-insiders have information about their own firms not possessed by outsiders. • Ross shows that the capital structure decision is not irrelevant and an optimal capital structure may exist if : The nature of the firm’s invt., policy is signaled to the mket throught its capital structure decision and The manager’s compensation is tied to the truth or falsity of the capital structure signal. III AGENCY PROBLEMS AND MANAGERIALISM Overview: • Agency problems in relationships arise whenever the two parties do not have exactly the same objective function. • Then, benefits to one of the parties can come at the expense of another party. • In the context of the differences between objectives of management and shareholders, agency problems can lead to inefficiencies, which inefficiencies may be resolve by means of the market’s discipline of managers through takeovers or the threat of takeovers. Examples: Manager/employees vs. stockholder/owners Managerial perks are paid for by shareholders Inefficiency is a form of managerial perk. Agency problem arises when mgrs own only a fraction of the ownership shares of the firm. This partial ownership may cause mgrs to work less vigorously than otherwise and /or to consume more perquisites (luxurious office, company cars, memberships in clubs) because the majority owners ear most of the cost. It may result from a conflict of the interest b/w managers & shareholders o b/w shareholders & debt holders. Agency problems arise basically because contracts b/w mgrs (decision or control agents) and owners (risk bearers) cannot be costlessly written and enforced. Returning agency cost includes: Cost of structuring a set of contracts, Cost of monitoring and controlling the behaviour of agents by principals, Costs of bonding to guarantee that agents will make optima decisions or principals wil be compensated for the consequences of suboptimal decision and The residual loss, that is, the welfare loss experienced by principals, arising from the divergence /w agents’ A number of organization & market mechanisms serve to discipline self- serving managers & takeovers are viewed as the discipline of last resort.
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