Corporate Governance: Financial Responsibility, Controls and by Erik Banks (auth.)

By Erik Banks (auth.)

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While the market and relationship models are dominant in developed nations (particularly where the regime and practice of regulation, law and bankruptcy are well established) we can also consider a third model that appears to be linked closely with some emerging nations. ᔢ The hybrid model. 36 For instance, capital markets are illiquid, the market for corporate control is either inactive or nonexistent, and regulatory and legal frameworks are often in a nascent state. At a micro level, family interests often hold large ownership stakes, related company conglomeration is common, ownership ties between companies and banks can be significant, and relationships/cooperation with government bodies are very prevalent.

Investors may discover this only after it is too late. ) Indeed, there is a widespread belief that as a result of diffuse ownership, the single shareholder cannot make a difference. Fractional ownership conveys fractional benefits, but not fractional costs. If the single shareholder wants to improve the quality of information on what management is doing it must bear the full cost of doing so (other shareholders are unlikely to help defray the cost unless they all band together which, again, implies a cost).

14 THE FUNCTION OF CORPORATE GOVERNANCE investors thus have little to lose once they have committed their equity, and prefer riskier projects. When creditors assume greater control of the company during periods of financial distress they shift the company’s focus from high risk to low risk projects (typically those with a lower net present value (NPV)) in order to protect their own position. This is commonly referred to as the underinvestment problem. Value maximization and the search for enterprise value Assume that a company is operating under normal circumstances, meaning accountability is to the shareholders.

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