Professional Documents
Culture Documents
Sole proprietorship
Three major forms:
One person undertakes a business
The sole proprietorship
The individual and the business are the same
The partnership for tax and legal liability purposes
The limited liability corporation
Legal claimants can pursue the personal
property of the proprietor, not simply the
Note: There are also hybrid forms assets which are utilised in the business
Partnerships Partnerships
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Partnerships Limited Liability Corporation
A partnership is treated like a Stakes in ownership are sold as shares
proprietorship for liability purposes There is limited liability of shareholders
Each of the partners is jointly and That is, firms owners are personally
severally liable protected from liability
A damaged party may pursue the partners Their liability is limited to the extent of
singly or jointly for any amount the investment in the firm
claim may not be proportional to invested
capital or the distribution of earnings
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Separation of control from ownership Separation of control from ownership
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Other theories A Simple Model
Behavioral theories: Managers utility function:
Firm as a coalition of participants U = U(Q, )
Bargaining between the participants Given the demand and cost conditions, the
determines the goals of the firm constraint is
T(Q, ) = 0
Satisficing models: or Q)
The firm is too large, too complex and Maximize U = U(Q, )
operates in too uncertain an environment subject to T(Q, ) = 0
- Optimizing behavior not possible
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Checks on managerial discretion Checks on managerial discretion
Are there some mechanisms to check 2. Market for managers
discretionary behavior on the part of A manager under whom a firm does poorly,
managers?
will command lower price on this market
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Greenmail White Knight
Greenmail occurs when a large block of A white knight is a company (the "good
stock is held by an unfriendly company or guy") that gallops in to make a friendly
raider, who then forces the target company takeover offer to a target company that is
to repurchase the stock at a substantial facing a hostile takeover from another
premium to destroy any takeover attempt. party (a "black knight").
This is also known as a "bon voyage The white knight offers the target firm a
bonus" way out; although it will still be acquired, it
will be on more favorable terms or at
least, terms more to its liking.
Golden Parachute
Poison Pill
With this strategy, the target company aims at making its
own stock less attractive to the acquirer.
A golden parachute measure discourages an The flip-in poison pill allows existing shareholders (except
unwanted takeover by offering lucrative benefits the bidding company) to buy more shares at a discount.
to the current top executives, who may lose This type of poison pill is usually written into
their jobs if their company is taken over by the companys shareholder-rights plan. The goal of
another firm. the flip-in poison pill is to dilute the shares held by the
bidder and make the takeover bid more difficult and
Golden parachutes can be worth millions of expensive.
dollars and can cost the acquiring firm a lot of The 'flip-over' poison pill allows stockholders to buy the
money, therefore becoming a strong deterrent acquirer's shares at a discounted price in the event of a
to proceeding with their takeover bid merger. If investors fail to take part in the poison pill by
purchasing stock at the discounted price, the outstanding
shares will not be diluted enough to ward off a takeover.
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Macaroni Defense Capital market control
In this tactic, the target company issues a
large number of bonds that come with the 2. Free-riding problem (Grossman and Hart)
guarantee that they will be redeemed at a
higher price if the company is taken over. Each shareholder, anticipating a rise in
It's called a macaroni defense because the share price, will refuse to sell shares at
the existing, low market price
redemption price of the bonds expands, like
macaroni in a pot of boiling water. Rational for each shareholder
But raider will not find any incentive for
The target company must be careful it takeover
doesn't issue so much debt that it cannot
So price of shares will remain low
make the interest payments.
Incentives
4. Incentives
Try to align the interests of managers and
shareholders by designing proper
incentive schemes
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Incentives
- ESOPs (employee stock option plans)
Aim is to induce managers to work for
long-term profitability