Corporate Finance
Governance and Agency Problems
Corporate governance allocates decision, control and information rights when managers, shareholders, lenders and minority owners do not bear the same financial consequences.
Course purpose
The decision examined
Conflicts extend beyond managers and shareholders. Controlling owners may transfer value from minorities, while highly levered shareholders may accept risks that weaken creditors.
Objectives
Learning outcomes
- Identify principal, agent and financial conflict.
- Distinguish monitoring, bonding and residual loss.
- Analyse related-party decisions and creditor transfers.
Concepts
Key concepts
- Agency cost
- Information asymmetry
- Control
- Minority owners
- Covenants
- Related party
Syllabus
Course structure
- Ownership and decision
- Agency costs
- Managers
- Creditors
- Minorities
- Board and information
Extract
Analytical framework
Decompose agency cost
The economic cost of a conflict includes monitoring, commitments made to reassure capital providers and the loss that remains:
Agency cost
Additional control is useful only when the expected reduction in loss exceeds its own cost and does not block necessary decisions.
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