Scribd
Upload
13 views3 pages

De Thi K59 Mid-Term

The document discusses the principal-agent problem faced by Google and Apple. It explains how Apple shareholders demanded cash payouts, resulting in Apple distributing 72% of cash flow but possibly losing its innovative edge. Google retained more ownership control, distributing only 6% of cash flow and engaging in more innovation despite some failures.

Uploaded by

K59 NGUYEN BAO NGAN
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
13 views3 pages

De Thi K59 Mid-Term

The document discusses the principal-agent problem faced by Google and Apple. It explains how Apple shareholders demanded cash payouts, resulting in Apple distributing 72% of cash flow but possibly losing its innovative edge. Google retained more ownership control, distributing only 6% of cash flow and engaging in more innovation despite some failures.

Uploaded by

K59 NGUYEN BAO NGAN
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 3

CTTT

Foreign Trade University


School of Economics and International Economics
Department of Economics and Management

MID-TERM EXAM (120 minutes)


COURSE OF BUSINESS ECONOMICS
For K59 - Advanced program

Question 1. (2 points) For the firms with sales revenue maximization objectives and non-
linear total revenue and total cost functions, what will happen as:
a. firms buy a new assembly line?
b. labor cost for producing goods decreases?
(Using graphs and arguments for your explanations)

Question 2. (2 points) Explain your understanding about the owner-controlled firms?

Question 3. (2 points) The estimated regression (Px is the price of the product, P o is that of
another product and Y is real income) is as follows: LogQx = 100 - 1.6 LogPx - 0.5 LogPo -
1.3 LogY

(R2=0.81 and all coefficients are statistically significant)


Answer the below questions and explain clearly the reasons:
3.1. The initial values of variables are: Px = $100, Po=$120 and Y= $1000. What is the value
of the quantity demanded?
3.2. As price of the product increases by 1%, how will the quantity demanded change? Does
this result follow the Law of Demand?
3.3. Is this good normal or inferior?
3.4. Is the another product complementary or substitute?

Question 4. (4 points)
Read the following article from Brain Misamore (2018), explain your understanding about the
principal – agent problems of Google and Apple? In your opinion, how could this problem
affect the performance of these two firms and other firms in real life? (explain with evidence
from real cases)

“CAN I TRUST YOU? HOW GOOGLE AND APPLE APPROACH THE PRINCIPAL-
AGENT PROBLEM

One of the most frustrating problems in modern finance is the issue known as the “principal-
agent problem.” In fact, most of our modern financial apparatus – the web of banks, equity
analysts, media reporters, and Boards of Directors, among others – exist mostly to find an
answer to this intractable problem. But what it is?
Let’s imagine that you suffered an injury that prevented you from leaving your home. You’d
still need to eat, so let’s say you hire someone to go to the grocery, purchase groceries, and
CTTT
CTTT

bring them back. You pay them a wage for this service and give them money for groceries.
This employee – this agent – is fulfilling a specific task for you, and you have desires
associated with that task. Namely, you’d like them to buy groceries, preferably at the same
quality and price point that you would have were you shopping for yourself.

But let’s take a moment to look at the incentives of that person. Once they get to the grocery
store, you aren’t there, and they have complete and total control over what they do with your
money. They could buy less expensive food than you might desire and cover it up from you,
pocketing the excess money. They might take advantage of sales and not inform you – once
again, pocketing the difference for themselves. You would not expect them to do this – after
all, you’re trusting them with your grocery budget and paying them to be contentious – but
you have no idea what they’re doing.

This example is a brief demonstration of the principal/agent problem. You – the principal –
are paying an employee – the agent – to provide a service, but the incentives involved
encourage that employee to behave in ways you might not desire. How do you solve this?
How do you place more control?

In the corporate world, the principals are by-and-large shareholders of companies, the owners
of companies that want them run for their own benefit. The agents are the corporate
executives, who earn a salary but might be able to benefit themselves in other ways through
their power in the company. For example, when it comes time to decide on corporate travel,
they might decide that C-level employees only fly first class – a benefit that accrues 100% to
the agent, but whose benefit to the principal is less clear.

How to solve this? It is the enduring question of the financial world, one without easy
answers.

Two of the biggest and most successful companies in the world – Apple and Google – are
grappling with this question today, both in completely different ways. Their experience has
some insight into just how intractable this problem is.

Early conditions at Apple in its entrepreneurial phase meant that its founders were forced to
sell off a large percentage of ownership to investors and the broader stock market. As a result,
today, those investors wield outsized clout over the company’s operations. They have used
this power to dramatically rein in the executives of Apple, dictating policies on a number of
issues, but most specifically cash flow allocation.

In 2012, Apple shareholders engaged in a “revolt” against management, demanding that the
company pay some of its cash reserves to shareholders in the form of dividends or stock
buybacks. In other words, the investors saw that Apple was profitable, and they wanted to
have a bit of those profits for themselves in the form of cash payouts. Apple management
resisted, stating that they’d prefer to save the cash reserves for future expansion and growth.

CTTT
CTTT

The power of the shareholders carried the day, and over the next few years, Apple paid out
72% of their operating cash flow.

In this case, shareholders used their power over management to push their own solution to the
principal/agent problem, and they were rewarded with a large share of Apple’s profits. But
it’s helpful to think about the consequences. There’s reason to believe that Apple may have
lost its edge in technology over the last decade, and management is clearly not investing as
much in innovation as they were before. Was paying out this cash to investors a mistake?

A counter-example is Google. Google’s founders were able to retain a large percentage of


ownership, and they used this power to further entrench themselves, giving their shares larger
voting authority than regular shareholders. As a result, Google only distributed 6% of their
operating cash flow to shareholders over the same period in which Apple was distributing
72%.

What has that meant for Google? Well, in that period, Google engaged in widespread
expansion: self-driving cars, medical research, space technology, and wearables such as
Google Glass. Many of these (Google Glass is the most notable) have been unsuccessful –
should Google have instead given the amount they would have invested into that project back
to their shareholders in the form of dividends or buybacks? Or is occasional failure the price
of innovation? Are Apple shareholders taking too much of a short-term view, while Google’s
management-centric power structure allowing them to take the long-term view? Or is Google
wasting shareholder money on flights of fancy?

We don’t have good answers for these questions, and the principal-agent problem isn’t going
away any time soon. As these examples show, there can be good and bad to both approaches,
and we won’t know which path was better (or even if both were good or both were bad) until
the future. For now, we must wait and see, while wondering if we will ever find a solution to
mismatched incentives and the fundamental question of human association – can I trust you?

Reference: Brian Misamore (2018), Can I trust you? How Google and Apple approach the
Principal – Agent problem, https://online.hbs.edu/blog/post/apple-google-principle-agent-
problem

CTTT

You might also like