Why is manager effort usually unobservable to the firm’s owners? What problem of information asymmetry results? If the manager receives a straight salary, what is the effect of this information asymmetry on the manager’s effort in a single- period contract?
Answer to relevant QuestionsGive some reasons why the payoff from the manager’s current- period effort is typically not fully observable until a subsequent period. How do contracts respond to the need to pay managers currently, despite current ...Suppose in Example 9.2 that net income turns out to be $ 25, despite the assumption that net income can only be one of $ 115 or $ 40. How could this happen, and what does it say about the completeness of the compensation ...Mr. K, a risk- neutral investor, is contemplating a one- year 8% loan of $ 500 to firm J. Mr. K demands at least a 6% expected return per annum on loans like this. K is concerned that the firm may not be able to pay the ...Cain, Denis, and Denis (CDD; 2011) studied a sample of acquisitions in the United States during the years 1994– 2003. The target firms for most of these acquisitions were non-publicly traded companies. A problem faced in ...Refer to Theory in Practice 11.2, concerning General Electric Co. (=GE). In particular, consider the strong negative market reaction to lower reported earnings in April 2008. Required a. Why did GE’s share price fall? b. ...
Post your question