WEEK 1

Sole proprietorship
- no separation between the firm and owner
- unlimited personal liability
- limited life
- easy to create

Partnership
- more than one owner
- unlimited personal liability
- General Partners (unlimited liability, run business), Limited Partner (can’t lose more
than their initial investment, no management authority)

Limited Liability company

- no general partner
- limited liability
- no separation of ownership and control

Cooperation
- separation from its owners → so the corporation is solely responsible for its
obligations. Board of Directors (elected by shareholders) have ultimate
decision-making authority and the CEO makes day-to-day decisions
- ownership represented by shares of stock
- must be legally formed by filing a charter in the state (US) it wishes to incorporate in
and the state then charters the corporation which is formally approving the
incorporation.

Arbitrage
Buying and selling equivalent goods in different markets to exploit a price difference. It can
make a profit without taking any risk or making any investment.Buying cheap and selling
expensive.

Law of One Price

Equivalent investment opportunities that trade simultaneously in different competitive
markets, must trade for the same price in all markets.

MMI
The market value of equity + the market value of debt = the market value of equity in an
unlevered firm = the market value of the firm’s assets. (E+D = U = A)

MMII
𝐷
𝑟𝐸 = 𝑟𝐴 + 𝐸
(𝑟𝐴 − 𝑟𝐷)

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WEEK 2
Interest Tax Shield
An interest tax shield is the reduction in taxes paid because interest is first deducted before
the profit is taxed. The amount of the interest tax shield is the amount that can be paid
additionally to investors. (corporate tax rate x interest payments)

MM I with Taxes
𝐿 𝑈
𝑉 = 𝑉 + 𝑃𝑉(𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑇𝑎𝑥 𝑆ℎ𝑖𝑒𝑙𝑑)

MMII with Taxes

𝐸 𝐷
𝑟𝑊𝐴𝐶𝐶 = 𝐷+𝐸
𝑟𝐸 + 𝐷+𝐸
𝑟𝐷 × (1 − 𝑇𝐶)

Double taxation problem

The cash flows to investors are typically taxed twice:
1) corporate levels
2) interest or dividend payment

For individuals, the interest payments received from debt are taxed as income and equity
investors must also pay tax on dividends and capital gains.

Low Leverage Puzzle

An average firm shields much less of its earnings than is allowed.
→ If a firm’s future cash flows are unstable and highly sensitive to shock, it runs the risk of
bankruptcy if they use too much debt.

Financial Distress
When a firm has trouble meeting its debt obligations.

Default
When a firm fails to make the required interest or principal payments on its debt. Depends
on the relative value of the firm’s assets and liabilities, not on its cash flows.

Economic Distress
A significant decline in the value of a firm’s assets.

Liquidation
A trustee is appointed to oversee the liquidation of the firm’s assets through an auction. The
proceeds are used to pay the firm’s creditors and the firm ceases to exist,

Reorganization
All pending collection attempts are automatically suspended, and the firm’s existing
management is given the opportunity to propose a reorganization plan ( → treatment of each
creditor). Creditors must vote to accept the plan and it must be approved by the bankruptcy
court.

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Workout
Avoiding bankruptcy by a firm in financial distress by negotiating directly with its creditors to
reorganize.

Pre pack
Avoiding many of the legal and other direct costs of bankruptcy by first developing a
reorganization plan with the agreement of its main creditors and then filing reorganization to
implement the plan.

WEEK 3
Tradeoff Theory
Trade off the benefits of debt that result from its interest tax shield against the costs of
financial distress associated with leverage.

PV(Financial Distress costs) depends on

1) probability
2) size
3) discount rate

Agency costs
Costs that arise when there are conflicts of interest between the firm’s stakeholders.

Exploiting Debt Holders: Agency Costs of Debt

Manager is appointed by shareholders and may make decisions that benefit shareholders
but harm the firm’s creditors and lower the total value of the firm, when a firm has leverage.
The manager will take on risky investments (excessive risk taking) when in financial distress
because equity holders have nothing to lose: they can only benefit if the investment is
successful. The equity holders are gambling with the debt holders’ money .

Asset Substitution Problem

When a firm faces financial distress, shareholders can gain at the expense of debt holders
by taking a negative NPV project, even if it is risky. Anticipating this bad behaviour, debt
holders will pay less for the firm initially.

Debt Overhang and Under-Investment Problem

Equity holders choose not to invest in a positive NPV project because the firm is in financial
distress and the value of undertaking the investment opportunity will go to debt holders
rather than themselves.

Another Under-Investment Problem

If it is likely that the firm will default, the firm may sell assets below market value and use the
funds to pay an immediate cash dividend to benefit the shareholders, because default cost
will be borne by debt holders eventually.

Agency costs of debt can be mitigated by:

1. taking on short-term debt so shareholders have less opportunities to profit at
creditors’ expense before the debt matures.
2. debt covenants: restriction on the actions that the firm can take.

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Management Entrenchment
Managers may make decisions that benefit themselves at investors’ expenses as a result of
the separation of ownership and control. They choose a capital structure that avoids debt
and maintains their own job security.

Agency Benefits of Leverage

- the original owners maintain their equity stake, and as major shareholders they will
have a strong interest in doing what is best for the firm.
- with leverage, the original owners maintain their equity stake, and will bear the full
cost of any “perks”, like club membership or private jets.
- reduce the degree of managerial entrenchment because managers are more likely to
be fired when a firm faces financial distress. So the managers may be more
concerned about their performance and are less likely to engage in wasteful
investment
- in an highly levered firm, creditors will closely monitor the actions of managers
- threat of financial distress, may make managers pursue strategies with greater
energy.
- become a fiercer competitor and act more aggressively in protecting its markets
because it can't risk the possibility of bankruptcy.

Credibility Principle
Claims in one’s self-interest are credible only if they are supported by actions that would be
too costly to take if the claims were untrue.
“Actions speak louder than words”

Leverage as a Credible Signal

Communicate positive information by committing the firm to large future debt payments.
- if information is true → firm will have no trouble making the debt payments.
- if information is false → firm will have trouble paying its creditors and will experience
financial distress.

Signaling Theory of Debt

Use leverage as a way to signal good information to investors.

Adverse Selection
The average quality of assets in the market will be lower than the average quality overall
when the buyers and sellers have different information. This is because if the seller wants to
sell, the quality is probably low. And the seller doesn’t want to sell because they think buyers
will think they are selling a “lemon” and offer only a low price.

Lemons Principle
When a seller has private information about the value of a good, buyers will discount the
price they are willing to pay due to adverse selection.

Issuing Equity and Adverse Selection

- managers who know their prospects are good will not sell new equity.

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 - The Lemons Principle creates a cost for firms that need to raise capital from
investors to fund new investment. Because if they issue equity, investors will discount
the price they are willing to pay to reflect the possibility that managers have bad
news.

The Lemon Principle directly implies:

- Stock price declines on the announcement of an equity issue, because investors no
longer want to pay the pre-announcement price, because they want to pay a price
that reflects the possibility that the manager has bad news.
- The stock price tends to rise prior to the announcement of an equity issue, because
firms want to delay the issue until any good news that may increase the stock price
becomes public.
- Firms tend to issue equity when information asymmetries are minimized (immediately
after earning announcement).

Pecking Order Hypothesis

Managers prefer to fund investments by first using retained earnings, then debt, and equity
only as a last resort.

Market Timing view of capital structure

The firm's overall capital structure depends partly on the market conditions that existed when
it sought funding in the past.
- more likely to issue equity when market values are high, relative to book and past
market values

Optimal Capital Structure

Depends on market imperfections, such as taxes, financial distress costs, agency frictions,
and asymmetric information. Capital Structures are not often changed because of
transaction costs. As a result, most changes to a firm’s leverage ratio are likely to occur
passively, as the market value of the firm’s equity fluctuates with changes in the firm’s stock
price.

Declaration date Dividends

On this date, the board of directors authorizes the payment of dividend.

Record date Dividends

Only shareholders on record on this date receive the dividend.

Ex-Dividend date Dividends

Two days prior to a dividend’s record date, on or after which anyone buying the stock will not
be eligible for dividend.

Payable date (Distribution date) Dividends

A date, generally about a month after the record date, on which a firm mails dividend checks
to its registered stockholders.

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Special Dividend
A one-time dividend payment a firm makes, which is usually much larger than a regular
dividend.

Stock Split (Stock Dividend)

When a company issues a dividend in shares of stock rather than cash to its shareholders.

Open Market Repurchase

firm trades in regular exchanges over a longer interval.

Fixed Price Tender Offer

Firm offers to buy shares at a pre-specified price during a short period.

Dutch Auction
Firms list different prices at which they are willing to buy shares. Shareholders indicate for
each price how many shares they are offering. Firms pay the lowest price that can buy back
the desired number of shares.

Targeted Repurchase
Firm negotiates directly with a major shareholder to repurchase shares.

Cum-Dividend
When a stock trades before the ex-dividend date, entitling anyone who buys the stock to the
dividend. Pcum = Current Dividend + PV(Future Dividends)

MM Dividend Irrelevance
In perfect capital markets, holding fixed the investment policy of a firm, the firm’s choice of
dividend policy is irrelevant and doesn’t affect the initial share price.

Dividend Puzzle
Firms continue to issue dividends despite their tax disadvantage (generally taxed at a higher
rate).

Clientele Effect
The dividend policy of a firm reflects the tax preference of its investor clientele.

Dividend-Capture Theory
Absent transaction costs, investors can trade shares at the time of the dividend so that
non-taxed investors receive the dividend.

MM Payout Irrelevance
In a perfect capital market, if a firm invests excess cash flows in financial securities, the
firm’s choice of payout versus retention is irrelevant and does not affect the initial value of
the firm.

Trade off Retention

Retaining cash can reduce the costs of raising capital in the future, but it can also increase
taxes and agency costs.

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Dividend Smoothing
Maintaining relatively constant dividends.

Dividend Signaling Hypothesis

Dividend changes reflect managers’ views about a firm’s future earnings prospects.
- positive dividend surprises → management can afford higher dividends.
- negative dividend surprises → saving cash expecting future earnings cuts.
But this is a weaker signal than leverage because a dividend increase might also mean a
lack of investment opportunities or a dividend decrease might also mean that they need the
cash to exploit new positive NPV projects.

Share Repurchase Signaling

Share repurchases are a credible signal that the shares are underpriced, because if they are
overpriced a share repurchase is costly for current shareholders.

Stock Issuance/split
Distribution of additional shares to shareholders to keep stock prices in a certain range and
increase liquidity → # shares go up, and stock price decreases.

Reverse split
Combining several shares into one new share.

Spin-off
A transaction where a company establishes a division as a separate business entity. Two
advantages:
- Avoids transaction costs associated with a subsidiary sale.
- Special dividend is not taxed as a cash distribution.

WEEK 4
The WACC valuation method
1) FCF
2) 𝑟𝑤𝑎𝑐𝑐 𝑙𝑒𝑣𝑒𝑟𝑒𝑑
3) Discount FCF using this levered rwacc.

Debt capacity
The amount of debt at a particular date that is required to maintain the firm’s target
debt-to-value ratio.
𝐿
𝐷𝑡 = 𝑑 × 𝑉𝑡

The Adjusted Present Value (APV) valuation method

𝐿 𝑈
𝑉 = 𝐴𝑃𝑉 = 𝑉 + 𝑃𝑉(𝐼𝑇𝑆)
1) 𝑟𝑈
𝑈
2) 𝑉
3) Interest paid in year t (use amount of debt outstanding at the end of the prior year) to
calculate the Interest Tax Shield.

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 4) Discount ITS using 𝑟𝑈 (because when the firm maintains a target leverage ratio, its
future ITS have similar risk to the CF).
𝑈
5) Add 𝑉 and PV(ITS).

The Flow-to-Equity valuation method

1) Free Cash flow to Equity = FCF - (1-tc) x Interest Payments + (Net Borrowing)
2) 𝑟𝐸
3) NPV(FCFE) = discount FCFE by 𝑟𝐸

Multiples valuation method

1) Identify comparable firms that have similar operations to the firm.
2) Calculate multiples like P/B, P/E, P/S etc.
3) Apply these multiples to the corresponding measures for the target to get that firm’s
market value.

A project’s equity cost of capital

𝐷
𝑟𝐸 = 𝑟𝑈 + 𝐸
(𝑟𝑈 − 𝑟𝐷)

Determining a project’s incremental financing

- Cash is negative debt.
- A fixed equity payout policy implies 100% debt financing. 𝑟𝑤𝑎𝑐𝑐 = 𝑟𝑈 − 𝑡𝑐𝑟𝐷
- Optimal leverage depends on project and firm characteristics.
- Safe cash flows can be 100% debt financed. 𝑟 = (1 − 𝑡𝑐)𝑟𝐷

Constant Interest Coverage Ratio

When a firm keeps it interest payments equal to a target fraction (k) of its free cash flows.

A comparison of the valuation methods

Use the WACC method when the firm will maintain a fixed debt-to-value ratio.
Use the APV method for alternative leverage policies.
Use the FTE method in complicated settings where the values in the firm’s capital structure
or the ITS are difficult to determine.

Issuance Costs
Fees that banks charge when they provide the loan or underwrite the sale of the securities.
These fees should be included as part of the project’s required investment, reducing the
NPV of the project.

Security Mispricing
If management believes that the securities they are issuing are priced differently than their
true value, the NPV of the transaction should be included in the value of the project.

Periodically Adjusted Debt

In the “real world” most firms allow their debt-equity ratio to stray from their target and
periodically adjust leverage to bring it back into line with the target.

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Annually Adjusted Debt
Things like the PV of the ITS, project-based WACC, and constant interest coverage model
1+𝑟𝑈
are enhanced by a factor 1+𝑟𝐷
.
Fixed schedule for Debt
When debt is set according to a fixed schedule for some period of time, the ITS for the
scheduled debt are known, relatively safe cash flows. These safe cash flows will reduce the
effect of leverage on the risk of the firm’s equity → the value of these “safe” tax shields
should be deduced from the debt.

Angel Investors
Individual investors who buy equity in small private firms. They are often rich and successful
entrepreneurs and they invest a small amount in the early stage of a firm.

Venture Capital Firm

A limited partnership that specializes in raising money to invest in private equity of young
firms. Venture Capital firms offer Limited Partners advantages over investing directly in
start-ups as angel investors, because this is more diversified and they can benefit from the
expertise of the General Partners. However, they need to pay a fee.

Private Equity Firm

This firm is organized like a venture capital firm but they invest in existing privately held
firms’ equity rather than start-ups. And they also engage in buyouts of public companies.

Institutional Investors
Institutions, such as pension funds, insurance companies, endowments, and foundations,
are active investors in private companies.

Corporate Investors (corporate partner, strategic partner, strategic investor)

A corporation that invests in private companies. They not only invest for the financial returns,
but they might also invest for corporate strategic objectives.

Preferred stock
Mature companies → preferential dividend, seniority in liquidation, sometimes special voting
rights.
Young companies → seniority in liquidation, right to convert to common stock.

Funding round
Each time the firm raises money. The initial round is called “seed round” and the
consecutive rounds are named alphabetically.

Participation rights
These allow investors to receive both liquidation preference and any payment to common
shareholders as if they had converted the shares.

Liquidation preference

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A minimum amount paid to preferred stockholders before common shareholders in
liquidation/sale/merger.

Anti-Dilution protection
Lower the price at which investors in earlier rounds can convert their shares to common.
Exit Strategy
Exiting an investment in a private company through either an acquisition or a public offering.

Initial Public Offering

The process of selling stock to the public for the first time.

Underwriter
An investment banking firm that manages a security issuance and designs its structure.

Best-Effort Basis
For smaller IPOs, the underwriter does not guarantee that the stock will be sold, but instead
tries to sell the stock for the best possible price.

Firm Commitment
An agreement between an underwriter and an issuing firm in which the underwriter
guarantees that it will sell all of the stock at the offer price.

Auction IPO
A method of selling new issues directly to the public. The underwriter takes bids from
investors and then sets the price that clears the market.

Registration Statement
A legal document with financial and other information about a company to investors prior to a
security issuance.

Preliminary Prospectus (Red Herring)

Part of the registration statement prepared by a company prior to an IPO that is circulated to
investors before the stock is offered.

Final Prospectus
Part of the final registration statement prepared by a company prior to an IPO that contains
all details of the offering, including the number of shares and the offer price.

Road Show
During an IPO, a company’s senior management and its underwriters travel around
promoting the company and explaining their rationale for an offer price to the underwriters'
largest customers.

Book Building
Collecting investors’ indicative bids in road show and then add up the total demand and
adjust the price until it is unlikely that the issue will fall.

Spread

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The fee a company pays to its underwriters, that is a percentage of the issue price of a share
of stock.

Over-Allotment Allocation
An option that allows the underwriter to issue more stock in an IPO.

Lockup
Existing shareholders can sell their shares only 180 days after an IPO.

The “Winner’s Curse”

Asymmetric information among potential investors. Informed investors only bid for attractive
IPOs while uninformed investors bid for both. This leads to oversubscribed attractive IPOs,
meaning that the uninformed investors get rationed with a pro-rata share. And in unattractive
IPOs, they get all the shares.

Seasoned Equity Offering (SEO)

When a public company offers new shares for sale. This can be done by a cash offer in
which a firm offers the new shares to investors at large, or by a right offer only for existing
shareholders.

Default risk
Risk that the issuer fails to service interest or principal payments.

Credit spread risk

Difference in yield between a debt security and a benchmark asset. This is relevant for
investors who do not hold until maturity.

Credit downgrade risk

Rating downgrade has significant price impact (discontinuity).

Bearer Bonds
To receive a coupon payment, the holder must provide explicit proof of ownership by literally
clipping a coupon off the bond certificate and remitting it to the paying agent. The owner is
whoever that physically holds the bond certificate.

Registered Bonds
To receive a coupon payment, the holder must be on the list. This list of all holders of its
bonds is maintained by the issuer.

Unsecured debt
A type of corporate debt that, in the event of bankruptcy, gives bondholders a claim to only
the assets that are not already pledged as collateral on other debt. (notes)

Secured debt
A type of corporate debt in which specific assets are pledged as collateral. (debentures)

Mortgage Bonds
A type of secured corporate debt in which real property is pledged as collateral.

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Asset-Backed Bonds
A type of secured corporate debt in which specific assets are pledged as collateral.

Seniority
A bondholder’s priority in claiming assets not already securing other debt.
Domestic Bonds
Bonds issued by a local entity and traded in a local market, but purchased by foreigners.

Foreign Bonds
Bonds issued by a foreign company in a local market and intended for local investors.

Eurobonds
International bonds that are not denominated in the local currency of the country in which
they are issued.

Global Bonds
Bonds that are offered for sale in several different markets simultaneously. They can be
offered for sale in the same currency as the country of issuance.

Term loans
A bank loan that lasts for a specific term.

Syndicated Bank loan

A single loan that is funded by a group of banks.

Revolving Line of Credit

A credit commitment for a specific time period which a company can use when needed.

Private placements
A bond issue that is sold to a small group of investors rather than the general public.

Sovereign Debt
Debt issued by national governments.

Municipal Bonds
Bonds issued by a state/local government.

Asset-Backed Securities (ABS)

Securities made up of other financial securities. Security’s cash flows come from the cash
flows of the underlying financial securities.

Asset Securitization
The process of creating an ABS by packaging a portfolio of financial securities and issuing
an ABS backed by this portfolio.

Callable Bonds

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Bonds that contain a call provision that allows the issuer to repurchase the bonds at a
predetermined price.

Call Provisions
A call provision allows the issuer of the bond the right to retire all outstanding bonds on a
specific date for the call price. Holders of callable bonds understand that the issuer will
exercise the call only when the coupon rate of the bond > the prevailing market (interest)
rate. If a bond is called, investors must reinvest the proceeds when market rates are lower
than the coupon rate they are currently receiving. This makes callable bonds less attractive
and will result in a lower bond price, and therefore a higher yield, than an otherwise
equivalent non-callable bond.

Sinking fund
A fund containing money set aside or saved to pay off a debt or bond.

Convertible Bond
A corporate bond with a provision that gives the bondholder an option to convert each bond
owned into a fixed number of shares of common stock,

Conversion ratio
The number of shares received upon conversion of a convertible bond.

Conversion price
The face value of a convertible bond / # shares received if the bond is converted.
If the price of the stock exceeds the conversion price, you will choose to convert.

Corporate governance
It refers to the design of institutions that induce or force management to internalize the
welfare of the stakeholders. It is focused on shareholder value, two agency conflicts of
interest arise: between managers and shareholders, and between controlling shareholders
and dispersed shareholders.

Conflicts managers and shareholders

- inefficient investments
- entrenchment
- insufficient effort
- self-dealing

Corporate governance is a positive NPV project

It mitigates agency conflicts, which will lead to cheaper access to funding in financial
markets. Good governance is value enhancing.

Internal governance
Board of directors, management compensation, shareholder monitoring.

Board of Directors

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Directors are elected by shareholders at the annual general meeting. The nomination
committee of board selects the suitable candidates. The directors represent shareholders
and monitor business decisions and provide advice to top management.

Inside directors
Current or former employees.

Gray directors
Persons having business relations with the firm.
Independent directors
Persons without links to the firm, usually CEOs of other firms, or other prominent people.

Board structures
Single-tier boards, and two-tier boards

Single-tier boards
Consists of executive and other directors. Trend towards delegating tasks subject to conlfict
of interest to sub-committees.

Two-tier boards
Supervisory boards appoint and supervise management boards. It formalizes different roles
of inside and outside directors.

The roles of monitoring and advising are difficult to combine: monitoring is about confronting
management decisions, advising about cooperating in the decision process. The number of
independent directors are increasing, because they are the best monitors and thus create
the most value.

Management compensation
Managerial effort cannot be directly observed. A solution is a compensation package, which
goals are to attract skilled top management, and to align management interest with those of
shareholders. They link compensation to firm performance.

Structure management compensation

- base salary
- annual cash bonus
- stocks/options
- long-term incentive plans
- special insurance and pensions plans

Shareholder monitoring/activism
Small, dispersed shareholders have weak incentives of exerting (costly) effort to monitor
management of the firm. What can shareholders do when the board is not fulfilling its role.
- shareholder loyalty → just accept it, since it is an unavoidable risk factor.
- shareholder exit → sell shares.
- shareholder voice → influence management or other shareholders.

Shareholder proposal

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Shareholders can put resolutions to a vote at general meetings.

Proxy contest
Bringing in a rival slate of directors who compete to be elected to the board.

External governance
Market competition, market for corporate control (M&A), regulations.

Market competition
Inefficient management strengthens the competitor’s position, which means that the firm
loses market share and can end up in economic distress.

Market for corporate control (M&A)

The takeover threat and risk of job losses can motivate management to work in the intesrst
of shareholders.

Reasons to acquire
- synergies → increase in value.
- economies of scale: the savings a large company can enjoy from producing goods in
high volume that are not available to a small company.
- economies of scope: savings large companies can realize that come from combining
the marketing and distribution of different types of related products.
- vertical integration
- gaining monopolistic power
- gaining expertise
- improvements in operating efficiency
- benefits related to diversification such as increased borrowing capacity and tax
savings.

Proxy fight
In a hostile takeover, in additiion to an unsolited offer to buy target shares, acquire also
attempt to convince target’s shareholders to unseat target’s board by using their proxy votes
to support acquirers’ candidates for election to target’s board.

Staggered boards
Each year only ⅓ of directors can be replaced.

Poison pills
An offering that gives existing target shareholders the right to purchase shares at a deeply
disocunted price.

Golden parachutes
Lucrative compensation package for target managers in case of a takeover and subsequent
dismissal of the managers.

White knight
Friendlier company to acquire the target.

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Recapitalization
Issue debt to pay dividends or repurchase shares.

Regulatory hurdles
Government intervenes if competition is threatened by takeover.

Free-rider problem
The target firm is poorly managed, resulting in a low share price. If the corporate raider can
take control of the firm and replace management, the value of the firm will increase. If the
offer price is higher than the current price, tendering shareholders will gain the difference.
However, non-tendering shareholders can “free ride”. By not tendering shares, they can
receive the potential price per share or a gain of the difference between the potential price
and current price. So, to persuade shareholders to tender their shares they should offer the
potential price so that a free-rider problem won’t occur. = Existing shareholders don’t have to
invest time and effort but still participate in all the gains from the takeover that the corporate
raider generates.

Mititaging the free rider problem mechanisms

Toeholds, freeze-out mergers, leverage buyouts.

Toeholds
Bidders can acquire initial toehold secretly.

Freeze-out mergers
Large shareholders pressure minority holders to sell their stakes at a lower tender price. If
the tender offer succeeds, the bidder merges the target’s assets into a new firm. Successful
bidders can compensate untendered holders at tender price.

Leveraged buyouts
After takeover, debt gets attached to the target's assets. Effectively, acquirers get the shares
without paying for them (debt).

Regulation
- Sarbanes-Oxley Act → to improve shareholder monitoring by increasing accuracy of
information and quality of internal control
- Dodd-Frank Act → to restrict excessive executive compensation and improve its
transparency, increase board independence, etc.

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