In: Finance
5) Why does an “agency problem” exist in corporations? Why is this problem unique to corporations and not partnerships or sole proprietorships? How can corporations minimize this problem? (10pts)
6) What is the concept of tax inversion? Why is the practice attractive to U.S. corporations? (5pts)
7) Who are “insiders” of a corporation? Why is illegal insider trading prohibited? Provide 2 examples of insider trading cases (provide names of the companies, the individuals involved, and the crime committed). (10pts)
5) Agency problems exist in corporations as the management which
is responsible for the daily operations of the organization are
different from the owners or the shareholders of the organization.
So it is probable that the agents (who are the management) would
act in a manner for their own benefit which might be counter
productive as far as interests of the owners are concerned and this
would give rise to the agency problem.
This problem is unqiue to corporations and not occur in
partnerships or sole propreitorship as in thse cases, the owner is
also part of the management and thus confict of interest does not
occur. The corporations can minimize this problem through a robust
corporate governance model and ensuring that internal systems and
controls are implemented well to protect shareholder
interest.
6) The concept of tax inversion is that the company may shift the
domicile of the organization to a place having lower tax rates
while continuing to operate from a place which provides better
resources and access to markets. This is attractive for
corporations as it would ensure lower tax outflow and consequently
better profits for the organization.
7) The insiders of an organization are key management personnel who
are privy to information regarding the organization's investment
plan, new product plans and growth opportunities into the future.
The insider trading is illegal because the management professionals
who are important may have assymetric information as compared to
general public and they could use this information to generate
unfair gains and this is absolutely prohibited.
The cases include:
1) Reebok insider trading case wherein a person named David Pajcin
was ordered by SEC to pay $28 million of fines for trading in
insider ifnormation based on tips from an investment banker.
2) Another improtant case was that of Mr. Rajat Gupta who was held
for tipping his freind who was a hedge fund manager. He was
involved with Goldman Sachs and held senior post in the firm.