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

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

6 of 7

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

Card 4

Front

Firms with lower debt are less disciplined

Back

Card 5

Front

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

Back

View more cards

Similar Economics resources:

See all Economics resources »

See all Corporate Finance resources »

Get Revising

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