ECO420 Corporate Governance

• Topics

  Corporate governance ('eierstyring' in Norwegian) refers to the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment. That is, how do investors (shareholders or lenders) make sure that the managers of the corporation do not waste the funds invested? Corporate governance centers on how investors ensure that managers have the right incentives.

  (This course does not address the question of how managers ensure that other employees have the right incentives. That question is instead covered in courses on management control and organizational economics.)

  For investors to be willing to provide financing for a firm, mechanisms protecting their interests must be in place. Such mechanisms can involve incentive contracts for company executives, legal protection of owner rights, ownership concentration and voting power, membership on the corporate board, or the discipline of product market competition. The purpose of this course is to get a thorough understanding of how these mechanisms work in theory and in practice.

  The course has three main components:

  1. Current debates and major topics in corporate governance . Readings for this component are newspaper articles and non-technical overviews. The main topics are:

  • An example of corporate governance gone horribly wrong: the Wirecard scandal
  • Stakeholder capitalism and ESG ("Environmental, social, governance") investing. Are these approaches good for investors? Are they good for society at large?
  • Executive pay. Are CEOs paid too much?
  • Institutional ownership. Are mutual funds good for corporate governance?
  • Law and corporate governance. Norwegian and US corporation law.
  • The Norwegian state and the Norwegian oil fund as owners of companies.
  • Recent examples of activist investors: Danone and Toshiba

  2. Microeconomic models of asymmetric information in the relationship between investors and management in a firm. In this part we closely follow selected chapters / sections from the textbook The Theory of Corporate Finance by Jean Tirole. The main topics here are:

  • Outside financing capacity
  • Corporate financing with adverse selection
  • Monitoring
  • Investor activism
  • Control rights
  • Takeovers

  3. Empirical analysis of a few key issues in corporate governance. Here we will read a few academic research papers. The topics are:

  • Bank CEO incentives and the financial crisis
  • Corporate governance and product-market competition
  • Common ownership, product-market competition and CEO incentives

• Learning outcome

  After completing the course, students will be familiar with the main issues in current debates about corporate governance. They will be familiar with central theoretical and empirical approaches to understanding corporate governance. The course provides a solid background that will allow them to discuss and evaluate corporate governance issues in a professional context.

  After completing the course, students

  Knowledge:

  • know the main features of the corporate governance framework within which all modern corporations operate, and why this framework is the way it is
  • know the main current debates in corporate governance
  • know the main challenges in corporate governance
  • know the main mechanisms used to resolve corporate governance incentive problems

  Skills:

  • Are able come up with ideas for how corporate governance questions can be studied with a theory model
  • Are able come up with ideas for how corporate governance questions can be studied with an empirical model
  • Are able to interpret results from theoretical and empirical studies on corporate governance questions

  Competence:

  • Are able to discuss issues in corporate governance with confidence, based on a broad knowledge of empirical and theoretical approaches as well as substantive issues
  • Are able to see why corporate financing takes the forms that it does
  • Are able to identify subtle incentive problems, and possible remedies, in investor-manager relationships
  • Are able to reflect in an informed and independent way about corporate governance, and more generally about the role of corporations in society

• Teaching

  It will be possible to follow the course digitally.

  Teaching will take the following forms:

  1. Pre-recorded lectures

  2. Q&A meetings about the lectures

  3. Compulsory student-led activities

  • Debates between two student groups on a given topic, where the two teams commit to argue for opposite views on the topic.
  • Group presentations

  4. Compulsory written group assignments, assessed with pass/fail

• Recommended prerequisites

  The course assumes the possession of or at least willingness to acquire some analytic skills in using and interpreting formal economic models. Knowledge corresponding to ECO400 or ECO401 is useful, although not strictly necessary.

  For a small part of the course, basic knowledge of linear regression, for instance from BUS444N, BUS444E, ECN402 or FIE401 is useful - but again not strictly necessary. Taking one of these courses in parallel with ECO420 would work very well.

• Credit reduction due to overlap

  None.

• Compulsory Activity

  Participation in compulsory student-lead activities and compulsory written group assignments. You may fail or miss one compulsory activity/assignment. But if there are two or more activities/assignments that you fail or do not participate in, you will not fullfill compulsory activities (work requirements).

  The exact number and nature of the compulsory activities/assignments will be announced at the start of the semester, but most likely it will be around five in total. They will involve a combination of the following:

  • Debates between two student groups on a given topic, where the two teams commit to argue for opposite views on the topic.
  • Group presentations
  • Written group assignments, assessed with pass/fail

• Assessment

  4 hour written individual home exam (in English).

• Grading Scale

  A - F.

• Computer tools

  None.

• Literature

  Textbook:

  Tirole: The Theory of Corporate Finance, Princeton University Press, 2006

  A list of articles.