<p>JENSEN/SMITH: Stockholder, Manager, & Creditor Interests</p><p>CORPORATION: A legal entity that serves as a nexus of contracts.</p><p>AGENCY RELATIONSHIP: Principal engages an agent to take action on behalf of the principal which involves delegation of some decision-making authority.</p><p>COMPETITION, CONTRACTS, SURVIVAL, & EFFICIENCY:</p><p>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. </p><p>DISTINGUISHING CHARACTERISTIC AMONG ALTERNATIVE </p><p>ORGANIZATIONAL FORMS: </p><p>Residual claims : Claims to net cash flows between inflows and promised payment to other claimholders. </p><p>Residual claimant(s) typically have the right to decide how the organization is run (organizational objectives and priorities, hiring/firing/compensation of senior management). </p><p>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: </p><p>Unrestricted</p><p>Shareholders need play no other role.</p><p>Average annual standard deviation (%)</p><p>49.2</p><p>Diversifiable risk 23.9</p><p>19.2</p><p>Nondiversifiable risk</p><p>Number of stocks 1 10 20 30 40 1000 in portfolio</p><p>Freely tradable.</p><p>Through corporate life.</p><p>DISADVANTAGES OF COMMON STOCK RESIDUAL CLAIMS:</p><p>Separation of decision control from decision management. SOURCES OF CONFLICT BETWEEN Managers and Shareholders:</p><p>CHOICE OF EFFORT</p><p>DIFFERENTIAL RISK EXPOSURE</p><p>DIFFERENTIAL HORIZONS CONTROL OF CONFLICT BETWEEN MGRS & SH:</p><p>INTERNAL: </p><p>Compensation contracts.</p><p>Board of directors.</p><p>EXTERNAL:</p><p>Managerial labor market.</p><p>Capital markets: Mergers, tender offers, proxy fights.</p><p>Large shareholders: Institutional investors.</p><p>Product markets: Bankruptcy (not very efficient).</p><p>Shareholder lawsuits.</p>