Chapter 1: Intro to Corporate Finance

activist investor

a party that buys a significant stake in a company in order to improve the stock price by changing how the board and C-suite run the company; if disagreements arise, a proxy fight often ensues

agency relationship

a situation where the principal hires an agent to act in their best interests; in the case of a corporation, the stockholders are the principals, and the board of directors and managers are their agents

agency costs (direct)

the measurable monetary costs that arise from conflicts of interest between the owners and managers of a corporation; 2 types of direct agency costs

• money the C-suite wastes on itself rather than paying to the shareholders

• resources expended to monitor the managers, such as audits

agency costs (indirect)

valuable opportunities that managers may forgo because they are highly risk-averse; impossible to quantify but they deprive the owners of potentially significant value creation

agent

the party in a an agency relationship hired to act in the principal’s best interest

articles of incorporation (charter)

documents a business files with a state to create a corporation; must include info about the corporations such

• purpose

• number of shares of stock

• structure of the board of directors

• etc

asymmetric info

situation where 2 contracting parties have different info sets; when one party has superior information and the other inferior, it can be difficult and costly to arrive at mutually agreeable termsb

board of directors 

the elected representatives of the shareholders who have a fiduciary obligation to act in the best interest of the stockholders

bond

a standardized debt instrument that is an alternative way to borrow money instead of a bank loan

bylaws

the rules and procedures established by the owners that govern the operation of a corporation