CFA Notes - Corporate Governance II

Note

（I）Principal-Agent Problem

i. Definition

The principal-agent problem refers to relationship between the principal and the agent in the information superiority because of the asymmetric information, which means unscrupulous agents can take advantage of any information asymmetry to mislead principals and maximize their own interests at the expense of principals.

ii. Managers vs Shareholders

The company's shareholders own the property of the company in the law, and the managers are only the paid employees of the shareholders. There may be conflicts of interests between managers and shareholders on certain issues. It includes the following aspects:

1. Compensation for managers;
2. Company expansion;
3. Dividend payment;
4. Information disclosed to shareholders.

iii. Controlling vs Minority Shareholder

In companyies in which a particular shareholders holds a controlling stake, conflicts of interest may arise among the controlling and minority shareholders. In such ownership structures, the opinions of miniority shareholders are often outweighed or overshadowed by the influence of the controlling shareholders.

iv. Shareholder vs Creditor Interests

From an investment perspective, shareholders would likely prefer risker projects with a strong likelihood of higher return potential, whereas creditors would likely prefer stable performance and lower-risk activities. A divergence in risk tolerence regarding the company's investments thus exists between shareholders and creditors.

v. Directors vs Shareholders

Directors also known as the executive directors, are people who are elected by the shareholders of the company to manage the company's affair with the actual power and authority. It is the main power of the internal governance of the company. The directors manage the company's affairs internally and externally represents the company's economic activities.

vi. Supervisors vs Shareholders

Supervisors are members of the permanent supervisory authority in the company, responsible for monitoring the financial situation of the company, the performance of the senior management of the company, and the other supervisory duties as stipulated in the articles of association of the company. One of the duties of supervisors is to protect shareholders' interests.

vii. Relationship

（II）Strategic Management

i. Definition

（a）Strategic Management

Strategic management is the formulation and implementation of the major goals and initiatives taken by a company's top management on behalf of owners, based on consideration of resources and an assessment of the internal and external environemnts in which the organization competes.

（b）Merger & Acquisition

Mergers and acqusiitions(M&A) are transactions in which the ownership of companies, other business organizations or their operating units are transferred or combined. As an aspect of strategic management, M&A can allow enterprises to grow, shrink, and change the nature of their business or competitive position.

ii. Merger

Merger is a statutory combination of two or more corporations by the tranfer of the property to one surviving corporation.

iii. Acquisition

An acquisition is the purchase of one business or company by another company or other business entity. This can happen in two ways - a takeover and a raid.

iv. Types of M&A

1. Merger；
2. Acquisition；
3. Takeover（善意）收购；
4. Leverage buyout杠杆收购

（a）Types of Merger

1. Conglomerater Merger；
2. Horizontal Merger

v. M&A Process

1. 收购对象与时机选择；
2. 收购风险分析与定价；
3. 制定融资方案；
4. 选择收购方式；
5. 谈判签约；
6. 信息披露；
7. 登记过户；
8. 收购后的整合，是否获得真正成功

（III）Financial Assets

i. Definition

Financial asset is a non-physical asset whose value is derived from a contractual claim, such as bank deposits, bonds, and stocks. Financial assets are usually more liquid than other tangible assets, such as equipment or real estate.

ii. Held-to-Maturity Investments

（a）Definition

Financial asset with fixed or with determinable payments and fixd maturity which the company has to be willing and able to hold till maturity are classified as "held-to-maturity" investments.

（b）Liquidity Ratio

1. Current Ratio；
2. Quick Ratio；
3. Cash Ratio

iii. Trading Securities

Trading security refers to category of financial assets that is acquired primarily for the purpose of sellilng in the near term. These assets are likly to be held only for a short period of time(less than three months).

iv. Available-for-sale Securities

Some financial assets are not classified as trading nor held-to-maturity investments, even though they are available to be sold. Such financial assets can be classified as available-for-sale securites.

v. Classification of Securities

a. Debt Securities

1. bonds；
2. debenture

b. Equity Securites

1. common stokc；
2. preferred stock

c. Derivatives

1. forwards；
2. futures；
3. options；
4. swaps

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（V）Dividend

i. Definition

A dividend is a distribution of a portion of a company's earings, decided by the board of directors, paid to a class of its shareholders.

ii. Cash Dividend

A cash dividend is money and paid to stockholders, normally out of the corporation's current earings or accumulated profits.

iii. Stock Dividend

A stock dividend is a dividend payment made in the form of additional shares rather than a cash payout. When issuing a stock dividend, the total value of equity remains the same from both the investor's perspective and the company's perspective.

iv. Dividend Distribution Process

1. Declaration date 股息宣布日；
2. Ex-dividend date 除去股息日(T)；
3. Holder-to-reward date 股权登记日(T+2)；
4. Payment date 股息发放日

v. Difference Between Cash Dividend and Stock Dividend

（a）支付形式

（b）适用条件

（c）对Investor的影响

（d）对Company的影响

（e）对Capital Market的影响

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