Agency Problem Essay 9
LEarNING OBJECtIVES
After studying this chapter, you should understand: LO1 The basic types of financial management decisions and the role of the financial manager. LO2 The goal of financial management. LO3 The financial implications of the different forms of business organization. LO4 The conflicts of interest that can arise between managers and owners.
I NTRODUCTION TO CORPORATE FINANCE mortgages getting into financial difficulties and
1
Overview of Corporate Finance Pa rt 1
IN 2007, A FINANCIAL CRISIS started in the
United States and spread around the world causing the global economy to plunge into a recession. The crisis was created by a boom in the U.S. housing market in 2004 and 2005 when consumers were attracted by low interest rates and overborrowed to buy houses on the expectation that housing prices would keep going up. The debt, in the form of mortgages, incurred by these consumers seemed manageable at first. However, in late 2006 as housing prices began falling and interest rates started rising, these mortgages became a big burden to service. Many households in the United States then started to default on their mortgages. This led to a chain reaction with several of the banks which were involved in the
needing the government to bail them out. The stage was set for the financial crisis that erupted in August 2007 and spread to the stock markets which experienced steep falls in stock prices in 2008 and early 2009. The financial crisis deepened into a global recession, the effects of which are still felt today. Analyses of the financial crisis suggest that the way executives of financial firms were compensated might have led them to take excessive risk spurring the crisis. Understanding executive compensation and the role of shareholders in that process takes us into issues involving the corporate form of organization, corporate goals, and corporate control, all of which we cover in this chapter.
To begin our study of modern corporate finance and
After studying this chapter, you should understand: LO1 The basic types of financial management decisions and the role of the financial manager. LO2 The goal of financial management. LO3 The financial implications of the different forms of business organization. LO4 The conflicts of interest that can arise between managers and owners.
I NTRODUCTION TO CORPORATE FINANCE mortgages getting into financial difficulties and
1
Overview of Corporate Finance Pa rt 1
IN 2007, A FINANCIAL CRISIS started in the
United States and spread around the world causing the global economy to plunge into a recession. The crisis was created by a boom in the U.S. housing market in 2004 and 2005 when consumers were attracted by low interest rates and overborrowed to buy houses on the expectation that housing prices would keep going up. The debt, in the form of mortgages, incurred by these consumers seemed manageable at first. However, in late 2006 as housing prices began falling and interest rates started rising, these mortgages became a big burden to service. Many households in the United States then started to default on their mortgages. This led to a chain reaction with several of the banks which were involved in the
needing the government to bail them out. The stage was set for the financial crisis that erupted in August 2007 and spread to the stock markets which experienced steep falls in stock prices in 2008 and early 2009. The financial crisis deepened into a global recession, the effects of which are still felt today. Analyses of the financial crisis suggest that the way executives of financial firms were compensated might have led them to take excessive risk spurring the crisis. Understanding executive compensation and the role of shareholders in that process takes us into issues involving the corporate form of organization, corporate goals, and corporate control, all of which we cover in this chapter.
To begin our study of modern corporate finance and