Jensen/Smith: Stockholder, Manager, & Creditor Interests

JENSEN/SMITH: Stockholder, Manager, & Creditor Interests

CORPORATION: A legal entity that serves as a nexus of contracts.

AGENCY RELATIONSHIP: Principal engages an agent to take action on behalf of the principal which involves delegation of some decision-making authority.

COMPETITION, CONTRACTS, SURVIVAL, & EFFICIENCY:

Absent fiat, the form of organization that survives in an activity, is the one that can deliver the product demanded by consumers at the lowest price while covering costs.

DISTINGUISHING CHARACTERISTIC AMONG ALTERNATIVE

ORGANIZATIONAL FORMS:

Residual claims : Claims to net cash flows between inflows and promised payment to other claimholders.

Residual claimant(s) typically have the right to decide how the organization is run (organizational objectives and priorities, hiring/firing/compensation of senior management).

Residual claimant in a For-profit public corporation: Not-for-profit corporation (Denver Art Museum): Public Universities: Private Universities: Residual claimant in a For-profit public corporation: Shareholders Not-for-profit corporation (Denver Art Museum): Donors Public Universities: State Tax-payers Private Universities: Alumni, Donors ADVANTAGES OF COMMON STOCK RESIDUAL CLAIMS:

Unrestricted

Shareholders need play no other role.

Average annual standard deviation (%)

Diversifiable risk 23.9

Nondiversifiable risk

Number of stocks 1 10 20 30 40 1000 in portfolio

Freely tradable.

Through corporate life.

DISADVANTAGES OF COMMON STOCK RESIDUAL CLAIMS:

Separation of decision control from decision management. SOURCES OF CONFLICT BETWEEN Managers and Shareholders:

CHOICE OF EFFORT

DIFFERENTIAL RISK EXPOSURE

DIFFERENTIAL HORIZONS CONTROL OF CONFLICT BETWEEN MGRS & SH:

INTERNAL:

Compensation contracts.

Board of directors.

EXTERNAL:

Managerial labor market.

Capital markets: Mergers, tender offers, proxy fights.

Large shareholders: Institutional investors.

Product markets: Bankruptcy (not very efficient).

Shareholder lawsuits.