Chapter 16 – Governing the
Corporation
Financing is how a firm’s money, banking, investments, and credit are
managed
Corporate governance is the relationship among various participants in
determining the direction and performance of corporations
o The primary participants in corporate governance are owners,
managers, and boards of directors – collectively known as the “tripod”
Equity is the stock in a firm (usually expressed in shares), which represents
the owners’ rights
o The cost of capital is the dividend
Shareholder is a firm owner
Debt is a loan that the firm needs to pay back at a given time with an interest
Bond is a loan issued by the firm and held by creditors
o The cost of capital is the interest
Bondholder is a buyer of bonds
Dividends can be curtailed or cancelled
Default is a firm’s failure to satisfy the terms of a loan obligation
Cost of capital is the rate of return that a firm needs to pay to capital
providers
Cross-listing is listing shares on a foreign stock exchange
Concentrated ownership and control is when the founders start up firms and
completely own and control them on an individual or family basis
Diffused ownership is publicly traded corporations owned by numerous
small shareholders but none with a dominant level of control
Separation of ownership and control is the dispersal of ownership among
many small shareholders, in which control is largely concentrated in the
hands of salaried, professional managers who own little (or no) equity
Top management team (TMT) is the team consisting of the highest level of
executives of a firm led by the CEO
Chief executive officer (CEO) is the main executive manager in charge of the
firm
Agency relationship is the relationship between principals (such as
shareholders) and agents (such as professional managers)
Principal is a person (such as owner) delegating authority
Agent is a person (such as manager) to whom authority is delegated
Agency theory is a theory that focuses on principal–agent relationships (or in
short, agency relationships)
Principal–agent conflicts are conflicts between principals and agents
o Can result in agency costs, including
The principals’ costs of monitoring and controlling the agents
The agents’ costs of bonding (signaling their trustworthiness)
Agency costs are the costs associated with principal–agent relationships
Information asymmetries is asymmetric distribution and possession of
information between two sides
Corporation
Financing is how a firm’s money, banking, investments, and credit are
managed
Corporate governance is the relationship among various participants in
determining the direction and performance of corporations
o The primary participants in corporate governance are owners,
managers, and boards of directors – collectively known as the “tripod”
Equity is the stock in a firm (usually expressed in shares), which represents
the owners’ rights
o The cost of capital is the dividend
Shareholder is a firm owner
Debt is a loan that the firm needs to pay back at a given time with an interest
Bond is a loan issued by the firm and held by creditors
o The cost of capital is the interest
Bondholder is a buyer of bonds
Dividends can be curtailed or cancelled
Default is a firm’s failure to satisfy the terms of a loan obligation
Cost of capital is the rate of return that a firm needs to pay to capital
providers
Cross-listing is listing shares on a foreign stock exchange
Concentrated ownership and control is when the founders start up firms and
completely own and control them on an individual or family basis
Diffused ownership is publicly traded corporations owned by numerous
small shareholders but none with a dominant level of control
Separation of ownership and control is the dispersal of ownership among
many small shareholders, in which control is largely concentrated in the
hands of salaried, professional managers who own little (or no) equity
Top management team (TMT) is the team consisting of the highest level of
executives of a firm led by the CEO
Chief executive officer (CEO) is the main executive manager in charge of the
firm
Agency relationship is the relationship between principals (such as
shareholders) and agents (such as professional managers)
Principal is a person (such as owner) delegating authority
Agent is a person (such as manager) to whom authority is delegated
Agency theory is a theory that focuses on principal–agent relationships (or in
short, agency relationships)
Principal–agent conflicts are conflicts between principals and agents
o Can result in agency costs, including
The principals’ costs of monitoring and controlling the agents
The agents’ costs of bonding (signaling their trustworthiness)
Agency costs are the costs associated with principal–agent relationships
Information asymmetries is asymmetric distribution and possession of
information between two sides
