ACF Tutorial 1: Capital raising, entrenchment + macro economic conditions

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  • Created by: charlie
  • Created on: 01-05-18 10:00
Managerial entrenchment
Managers exert their high power to pursue own interests and not SH (failed to be controlled by corporate governance mechanisms)
1 of 7
Conflicts of interest/ agency costs controlling mechanisms (beyond whats given in lecture)
1) Performance-based compensation (options) 2) board monitoring (large SH on board) 3) SH monitoring (blockholder) 4) Threat of dismissal (work contracts/ acquisition threat)
2 of 7
Firms with higher debt are discipined
Faced -ve shocks to entrenchment (controlling mechanisms) / need financing for +ve NPV projects
3 of 7
Firms with lower debt are less disciplined
Heavily entrenched (no controlling mechanisms)
4 of 7
Capital raising in boom: supply (investors) / demand (firms)
Investment + non-investment grade firms raise capital
5 of 7
Capital raising in recession: supply (investors)
1) Flight to quality 2) investors hold more cash (relative pricing) 3) Asymmetric info issue widens 4) Investment grade counter-cyclical 5) Non-Investment grade cyclical
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Capital raising in recession: demand (firms)
1) Asymmetric information widens (systematic + idiosyncratic risk hard to differentiate) 2) Good firms get below what demanded/ Bad firms get above 3) Shift from equity to debt
7 of 7

Other cards in this set

Card 2

Front

Conflicts of interest/ agency costs controlling mechanisms (beyond whats given in lecture)

Back

1) Performance-based compensation (options) 2) board monitoring (large SH on board) 3) SH monitoring (blockholder) 4) Threat of dismissal (work contracts/ acquisition threat)

Card 3

Front

Firms with higher debt are discipined

Back

Preview of the front of card 3

Card 4

Front

Firms with lower debt are less disciplined

Back

Preview of the front of card 4

Card 5

Front

Capital raising in boom: supply (investors) / demand (firms)

Back

Preview of the front of card 5
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