Corporate Finance by G.M. Constantinides, M. Harris and R.M. Stulz (Eds.)

By G.M. Constantinides, M. Harris and R.M. Stulz (Eds.)

Quantity 1A covers company finance: how companies allocate capital - the capital budgeting determination - and the way they receive capital - the financing choice. notwithstanding managers play no self sufficient function within the paintings of Miller and Modigliani, significant contributions in finance when you consider that then have proven that managers maximize their very own goals. to appreciate the firm's judgements, it's hence essential to comprehend the forces that lead managers to maximise the wealth of shareholders

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Indeed, other constituencies besides shareholders face the same basic collective action problem Corporate bondholders are also dispersed and their collective action problems are only imperfectly resolved through trust agreements or consortia or in bankruptcy courts In large corporations employees and clients may face similar collective action 29 Alternatively, limiting managerial discretion ex ante and making it harder to change the rules by introducing supermajority requirements into the corporate charter would introduce similar types of inefficiency as with debt.

26 liquidity raises speculators' return to acquiring information and thus improves the informativeness of the secondary market price The more informative stock price can then be included in compensation packages to provide better incentives to managers According to this view it is the market that does the monitoring and the large shareholder may only be necessary to act on the information produced by the market 45 In other words, there may be a natural complementarity between speculation in secondary markets and monitoring by large shareholders This idea is pursued further in Faure-Grimaud and Gromb ( 1999) and Aghion, Bolton and Tirole ( 2000) These models show how large shareholders' monitoring costs can be reduced through better pricing of shares in the secondary market The basic idea is that more accurate pricing provides not only greater liquidity to the large shareholder, but also enhances his incentives to monitor by reflecting the added value of his monitoring activities in the stock price The latter paper also determines the optimal degree of liquidity of the large shareholder's stake to maximize his incentives to monitor This theory finds its most natural application for corporate governance in start-ups financed with venture capital It is well known that venture capitalists not only invest large stakes in individual start-ups but also participate in running the firm before it goes public.

G , Knoeber ( 1986), Schnitzer (1995), Chemla (1998)l One lesson emerging from this research is that efficiency depends critically on which type of anti-takeover protection is put in place For example, Schnitzer (1995) shows that only a specific combination of a poison pill with a golden parachute would provide adequate protection for the manager's (or employees') specific investments The main difficulty from a regulatory perspective, however, is that protection of specific human capital is just too easy an excuse to justify managerial entrenchment Little or no work to date has been devoted to the question of identifying which actions or investments constitute "entrenchment behavior" and which do not It is therefore impossible to say conclusively whether current regulations permitting anti-takeover amendments, which both facilitate managerial entrenchment and provide protections supporting informal agreements, are beneficial overall.

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