Business Organization and Finance, Legal and Economic Principles
Authors:
Klein, William A. / Coffee Jr, John C. / Partnoy, Frank
Edition:
11th
Copyright Date:
2010
15 chapters
have results for Business Organizations and Finance, Legal and Economic Principles, 11 ed. by Williams A. Klein and John C. Coffee (2010)
Preface 6 results (showing 5 best matches)
- The principal objective of this book is to explain, in simple terms but not simplistically, (a) the basic economic elements and legal principles, as well as the language, of business organization and finance; (b) the interrelationships between and among the economic elements and legal principles; and (c) the practical importance of a basic understanding of those elements, principles, and interrelationships. While we like to think that the book contains some sophisticated ideas, we have tried to make it understandable for a person with no background whatsoever in business, in accounting, in economics, or in law. As our audience, we have tried to keep in mind a bright young woman or man from a family of musicians, with a college major in English, now entering a law school or a graduate school of business—on the brink of discovering, with great surprise, that the study of business can be interesting and enjoyable, as well as profitable, and that it need not be intimidating. Another...
- This edition of the book—its eleventh over the span of nearly three decades—will be the last to list William A. Klein as an author. Although Professor Klein will be retiring from the book as coauthor with this edition, his indelible imprint will remain. This book was his brainchild and will remain committed to his goal that an introduction to finance could be presented in a simple, direct style that minimized jargon and maximized lucidity. The remaining authors will try and live up to the standard of cogency that he set.
- The final three chapters are concerned with the field known as “corporate finance.” At a superficial level, there is a break between these chapters and the three that precede them. Yet there is continuity as well. The various corporate securities (common stock, bonds, etc.) and market instruments (options, margin loans, etc.) that are discussed in Chapter 4 can perhaps best be understood as devices for allocating control, risk, and return and for resolving other issues that are the underlying focal points of the first three chapters. Thus, Chapter 4 represents an effort to provide an understanding not just of the formal characteristics of financial instruments but of their economic function as well. In Chapter 5 the inquiry turns to valuation and considers the question of what difference it might make in the valuation of an enterprise whether control, risk, etc., are allocated one way rather than another. Chapter 5 also reviews some of the recent literature on relationships between...
- Because the book is intended for a bright but untutored audience, the order in which topics are considered reflects our intuitive sense of the order in which questions might occur to, and need to be answered for, such a reader. To that extent, we have abandoned a potentially more sophisticated logic that would have focused on such fundamental structural issues as control, risk and return, duration (including termination and withdrawal), conflicts of interest, and additional capital needs. We have also followed the traditional format of separating the law of proprietorship (agency), partnership, and corporations, resisting the temptation to demonstrate how each of these can best be seen as a set of legal rules resolving in different ways the underlying structural issues. We assume, however, that a thoughtful reader will ultimately be unable to avoid recognition and appreciation of that basic theme and its importance to an understanding of business organization.
- June 2010
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Chapter 2 Partnerships and Limited Liability Companies 184 results (showing 5 best matches)
- We have seen in Chapter 1 that there are business firms that normally are, and sensibly may be, thought of as “owned” by a single individual, the sole proprietor. As we examine such firms more closely, however, we may find a complex set of relationships between and among that owner and other contributors of economic inputs such as suppliers, lenders, and managerial and other employees. We then can see that the nonowner contributors to the economic venture may to various degrees share in ownership attributes such as risk of loss, an interest in profits, and control. Certain of the significant attributes of ownership may also be shared by customers—particularly those who buy much of what they need from the firm and have few, if any, alternative sources of supply. Thus, we can see that since the concept of ownership is not as simple and clearcut as one might have thought, neither are the distinctions among various forms of organization. Indeed, one important objective of this book is...
- In recent years the Limited Liability Company (LLC) has become the dominant form of legal organization for small businesses. For the present, however, the basic attributes of LLCs can best be understood by beginning with the more widely understood and more analytically developed legal and economic attributes of partnerships. The legal attributes of LLCs are described in Section X(B) of this Chapter.
- To recapitulate, the fiduciary obligation is a vague principle designed to achieve fair results by effectuating the presumed intention of members of a partnership as to matters on which they have not reached any express agreement. The vagueness is probably unavoidable because the principle must be applied to a virtually infinite variety of subtly differing situations. Given this variety and the objective of effectuating presumed intentions, application of the principle will usually require a detailed examination of the peculiar facts and circumstances of particular cases. Despite the obvious importance of facts and circumstances, it seems fair to suppose that the general principle does set a tone that has a significant impact on the outcome of disputes. The substantive content of the principle of fiduciary obligation will also have important economic consequences. For example, a rule that broadly defines the obligation to share the gains from one’s activities may significantly...
- Some lawyers think it is their responsibility not only to try to raise all the significant issues with which their clients may be confronted in the future but also to be sure that the clients understand those issues. Others will tend to pay less attention to such matters, fearing, as suggested, that it is too easy for the parties, because of their unfamiliarity with the law, or with business, to exaggerate the significance of the problems and, consequently, to forgo a business opportunity that the lawyer thinks they ought not to forgo. This kind of lawyer may express the idea by saying that he did not want to “spoil the deal.” Other lawyers will tend more often to think that if raising issues and pointing to problems kills a deal then it deserves to die. Obviously there are no formulas to tell the lawyer how to act with respect to this basic issue of client-handling strategy. No two deals, no two sets of clients, and no two lawyers are alike. There is no widely agreed upon “correct”...
- Still, even in the most smoothly continuous spectrum, lines can usefully be drawn. Accordingly, at this point in our examination of business organization, while recognizing that the basic elements of one form of organization can gradually be modified to the point where it fades into the next, we can observe that as we turn from proprietorship to partnership we enter the realm of economic arrangements exhibiting clearly the characteristic of straightforward joint ownership. As we examine the law and custom of partnership organization, we will try to give definition to the notion of joint ownership of a firm and try to gain an appreciation of both the problems encountered in such a relationship and the solutions that may be available for coping with those problems.
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Chapter 4 Basic Corporate Investment Devices: Economic Attributes and Formal Characteristics 315 results (showing 5 best matches)
- See Katz v. Oak Industries Inc., 508 A.2d 873 (Del.Ch.1986). There is some risk, however, that the coercion may be used unfairly to force the bondholders to accept bonds worth less than the value of their legitimate claim, though that risk may be small. See John C. Coffee, Jr. and William A. Klein, Bondholder Coercion: The Problem of Constrained Choice in Debt Tender Offers and Recapitalizations, 58 U. Chi. L. Rev. 1207 (1991); Marcel Kahan and Bruce Tuckman, Do Bondholders Lose from Junk Bond Covenant Changes? 66 J. of Business 499 (1993).
- a. In most of the traditional literature on the financial structure of firms, options and warrants receive relatively little attention. In part this may be attributable to the fact that warrants are relatively little used in the financing of modern public corporations. The same has been true of options until quite recently. Moreover, options are extraneous to the firm (a point explained immediately below). Nonetheless, options and warrants deserve substantial attention here, for several reasons. First, options are now widely traded and their existence is likely to have considerable impact on thinking about the financing of economic activity. Warrants are interesting in this connection because one’s understanding of options can be sharpened by comparing options and warrants. Second, an examination of options and warrants provides insights into the nature of other economic relationships in firms and provides or sharpens tools for the analysis of those relationships. Thus, for...
- Richard A. Brealey and Stewart C. Myers, Principles of Corporate Finance 360 (4th ed. 1991).
- of a corporation. The principal focus is on the two classic and most common investment devices, common stock (equity) and bonds or debentures (debt). (Compare Chapter 1, Sec. II(E), discussing debt and equity.) A certificate of common stock is a piece of paper that is tangible evidence of a set of rights, interests, or claims in an incorporated business. It can be thought of as a short-hand expression or symbol for all the rules determining the common shareholder’s position in relation to the basic elements that are the bedrock of business organization: risk of loss, return, control, and duration. The same can be said of the piece of paper that we call a bond or debenture. In this chapter we are concerned with the content of financial instruments (common stock and bonds, and certain other instruments such as preferred stock, options, and warrants) and the language and concepts that people use to describe that content. In the next chapter we will begin with an examination of basic
- The rules become a good deal more complex when the proceeding is not a straight bankruptcy but rather a reorganization under Chapter 11 of the Bankruptcy Code. A reorganization is a device for keeping the debtor “alive” despite its inability to meet its obligations to creditors. Even though the debtor may have defaulted on its obligations, secured creditors are legally restrained from enforcing their liens (that is, from seizing or forcing the sale of the property securing the debtor’s obligations). There is no sale of assets for cash to satisfy the claims of creditors. If the corporation has been managed fraudulently or with gross incompetence, the bankruptcy court may order a trustee to take control of the business—but that is rare. Often, even if a trustee is not appointed, new managers will take over. Sometimes, however, particularly if management has a large equity stake in the business, the incumbent management will remain in control. The objective of the reorganization...
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Chapter 3 Corporations 220 results (showing 5 best matches)
- A caveat.
- In the case of a closely held corporation, the shareholders are likely to be active in the management of the business and to be members of the board. The role of the board is then likely to be trivial and formalistic, except perhaps when there is a schism among the shareholders. In venture capital firms, as previously discussed (see Sec. I(C)(3)), the venture capital representatives (VC) are likely to serve on the board along with the founder/entrepreneurs and the VC may exercise significant managerial influence through its board membership. The VC may also exercise control in other ways. Generally, if all goes as expected, the relationship between the VC and the entrepreneur will be mutually cooperative and respectful. Trust and cooperation are highly valued in business relationships. The VC will often have valuable experience, insights, and contacts—all of which will be appreciated by the entrepreneur. But the VC is also likely to have control that does not depend entirely on good...
- Still, even at the end of the 19th Century, industrial businesses were not necessarily organized in corporate form. Andrew Carnegie ran his famous steel company as a limited partnership, in order that he, as a general partner, would not have to share control with his fellow investors (who as shareholders would have had a proportionate right to vote). John D. Rockefeller used the trust device to hold control of the various oil companies that he had assembled into the Standard Oil Trust, because state corporate law at the time typically forbade one corporation from owning stock in another. (Hence, Congress eventually passed “antitrust” laws instead of “anti-corporation” laws.) However, the passage of the Sherman Antitrust Act of 1890, and its subsequent judicial construction to bar, as a ...price-fixing agreement among competitors, set off the greatest merger wave in American history at the end of the century. Lawyers and businessmen recognized that, although price-fixing cartels were...
- From a legal perspective a corporation is a particular set of rules for the organization of economic entities. The core rules are found, for the most part, in the statutes—the corporation codes—of the various states. While the rules vary to some degree from state to state, the basic rules are much the same and are sufficiently complete so that little, if any, modification is required. The equity investors are called shareholders or stockholders; their ownership interests are reflected in shares of the common stock of the firm. The shareholders elect a board of directors, who in turn select the officers who run the business. The rules found in the corporation codes provide for how the elections take place, for the authority of the directors, for the duration of the enterprise, for the distribution of profits, for mergers with other corporations, and so forth. The founders of a corporation create the corporation (they “incorporate”) by filing certain documents with the appropriate...
- Startup corporations and venture capital.
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Introduction 24 results (showing 5 best matches)
- We begin with an overview describing briefly (a) the , involved in business ventures, categorized according to their economic roles, (b) the business with which they should be concerned (the economic of their relationship) and the constraints on their ability to achieve their goals, and (c) the
- The central figures in business organization are the owners and managerial employees, but lenders may also play an important role (for example, by imposing limitations on an owner’s freedom to hire or fire a manager or to expand the business), and often it is important to consider relationships with suppliers, customers, franchisees, and other people who may affect the way the business operates.
- This book examines three basic sets of legal rules or doctrines, and legal devices, used in the creation of business arrangements or organizations: those relating to the employment relationship, to partnerships, and to corporations.
- The purpose of presenting this list of legal rules and devices is not to bore you into a gentle slumber. It is in part to give you some idea of what you can expect to find later in the book, but, more importantly, to suggest that the legal rules and devices on which law-school study tends to focus are nothing more, nor less, than the tools by which entering into business relationships seek to resolve the issues described by the A competent lawyer must know the tools and how to use them, but a lawyer who uses the tools without an appreciation of the business setting and the goals of the client will be unable to respond effectively to the client’s needs. This proposition helps explain how this book was conceived and written, and why.
- Chapter 3 examines the organization of business in corporate form. Here the basic organizational structure is prescribed in the corporations code (set of statutory rules) of the state in which people choose to incorporate. To a considerable extent, people using the corporate form are not permitted to deviate from the basic formal structure prescribed by the corporations codes, but important substantive organizational rules (e.g., rules relating to sale of an equity interest in the firm and to control) can be tailored to individual needs either in the articles of incorporation or by-laws (which are formal documents of the corporation) or in so-called “ancillary” agreements (“side” agreements among people with interests in the corporation, such as an agreement on how voting rights will be exercised or an agreement by one investor to buy the interest of another on certain conditions). The federal and state securities laws have an important bearing on the nature of the organization of...
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Chapter 1 The Sole Proprietor 160 results (showing 5 best matches)
- Our objective is to understand the nature and functions of business organizations or entities. It is useful, however, to begin with an examination of the , which is a business owned directly by one individual, called a Since a sole proprietorship has no formal elements of co-ownership, it is usually not thought of as “business organization” in the legal sense. The fact is, however, that a business owned by a sole proprietor may be large and complex, involving many people other than the owner, and can plainly be an “organization” in the nonlegal sense of the term.
- In the parlance of economics, the relationship between Pamela and Shirley is referred to as organization of economic activity across or in the marketplace. The relationship between Pamela and Chuck is said to be organization of economic activity within a Chuck is thought to be part of the firm for this purpose (that is, for the purpose of comparing the Pamela–Shirley and the Pamela–Chuck relationships). Economists then worry about the question of why activities are sometimes organized across markets and sometimes within the firm, about what seem to be the most important characteristics of the firm, and about how firms operate. These issues have proved to be surprisingly intractable. It is worth noting that lawyers would view the Pamela–Shirley relationship as that of buyer and seller, of a businessperson dealing at arm’s length with another businessperson (called, in law, an independent contractor); and that this perspective is closely parallel to that of economists, who would...
- However useful economists may find the distinction between organization within firms and organization across markets, the distinction may not be of much value to lawyers concerned with the legal and economic aspects of shaping particular business arrangements. Lawyers who focus on “business organization” are concerned with relationships among co-owners and between owners and managers while economists, when they study and theorize about “firms,” are more concerned with the entire enterprise and its relationship to other enterprises. For lawyers, there is little need for manageable theories and much need for unscientific but sensible solutions to problems arising from complex relationships among a large number of relevant variables. Those variables include risk, control, duration, incentives, availability of objective tests of success, opportunities for stealing and for cheating and shirking and other forms of self-dealing, and ability to predict the future. It does seem plain, in any...
- We have examined two kinds of people involved in a simple economic enterprise—owners and creditors. Now we are ready to consider another set of people with a stake in the enterprise—employees. Before proceeding, however, it is important to note a subtle but important perspective that has been introduced into this descriptive account. To some considerable degree, the relationships among creditors, suppliers, employees, and owners are viewed here as ones involving contributors to a
- The business firm evolves from a process of bargaining between managers and investors (among others). The bargain may be implicit and the parties may adopt models developed by others. But regardless of the nature of the process, the people involved in it can be expected to seek to advance their own interests as much as possible. In the language of economics, managers, like owners, can be expected to seek to maximize their own utilities. It may seem surprising, but this idea is relatively new to economics. In earlier economic thinking, a business firm was thought of as maximizing “its” profits—as if the abstract concept (a firm or a corporation) were an individual acting as an owner-manager. That is, economists until recently (and to this day to some extent) talked as if the behavior of large corporations were the same as that of individual owner-managers. Much the same kind of thinking continues to dominate the legal concept of the firm. Managers (officers, directors, and others)...
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Chapter 3 Corporations Part 2 305 results (showing 5 best matches)
- 11
- The Williams Act.
- Golden Parachutes, Shark Repellents, and Hostile Tender Offers
- There is a substantial body of empirical studies of the various explanations for takeover gains. Description of, and citations to, many of these can be found in Roberta Romano,
- In the early history of corporate law in this country, shareholders did not enjoy limited liability. See Stephen B. Presser, Piercing the Corporate Veil § 1.03[1] (1991). “Limited liability is a statutory development that represents the rising power of business interests.” Phillip I. Blumberg, Limited Liability and Corporate Groups, 11 J. Corp. L. 573, 576 (1986). For a brief summary of policy discussions, see William A. Klein and Eric M. Zolt, Business Forms, Limited Liability, and Tax Regimes: Lurching Toward a Coherent Outcome? 66 U. Colo. L. Rev. 1001, 1029–36 (1995).
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Chapter 6 Financial Markets 208 results (showing 5 best matches)
- The core idea underlying such gatekeepers is that they possess a reputational capital that they have acquired over many years and many clients, which they can pledge to assure investors so that they will rely on representations that they would not accept if made only by the issuer. This certification function has, however, a dark side: sometimes gatekeepers cannot be trusted, as the 2008 financial meltdown reveals. See John C. Coffee, Jr., Gatekeepers: The Role of the Professions and Corporate Governance (2006).
- We began this book by focusing on the relationships among the human actors involved in business organizations or entities. To this point, we have covered many aspects of these relationships, as well as the corporate finance tools that participants in business enterprises use to arrange and order their affairs. Now, we want to place these basic concepts in the context of modern financial markets. As with Chapters 4 and 5, there is a break of sorts from our previous coverage, but there is continuity as well. At their heart, financial markets are devices for allocating control, risk, and return, and for resolving, or attempting to resolve, some of the tensions and conflicts that arise in business relationships. But the financial markets also present enormous complexity and new problems, which we will cover here.
- 1. Structured Finance and Securitization.
- A central question raised by the behavioral finance approach is how “irrational” traders can distort market prices if there also are rational traders in the market. After all, rational investors would presumably recognize mispriced stocks, buy those that are undervalued while selling those that are overvalued, and by doing so bring stocks back to their correct values. One answer to this question has been offered by a behavioral finance model commonly known as the “noise trading” model. This model assumes that there is a significant population of irrational traders in the securities market at any given moment, each striving to anticipate the often arbitrary trading behavior of other traders, rather than analyzing fundamental business prospects. Their aggregate influence is so pronounced that rational arbitrageurs are unwilling to bet against noise traders at sufficient levels to maintain securities prices that reflect only fundamental information. Classical economic theory rejected...
- Litigation ensued, as did a debate about when and whether parties such as Perry should be permitted to split the economic and legal interests of shares by using derivatives. Some argued that Perry’s shares should not be entitled to vote, because they were burdened, or , by the swap. The argument was that such did not satisfy the typical rationale for allocating votes to shareholders, namely that shareholders bear the residual gains and losses associated with corporate decisions. Others argued that encumbered shares should still be entitled to vote, but should be publicly disclosed. Most disputes have settled without judicial decision, and the few courts to address related issues have ranged widely, from criticizing shareholders who use swaps to giving swaps the same rights as actual shareholders. Whatever the arguments, though, no court has yet invalidated an economic reallocation of share rights.
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Title Page 8 results (showing 5 best matches)
Chapter 5 Valuation, Financial Strategies, and Capital Markets 328 results (showing 5 best matches)
- The discussion here is rudimentary. There is a rich, complex, mostly recent, body of economic and financial literature on what is generally referred to as “the determinants of capital structure.” For valuable reviews, see Stewart C. Myers, Financing of Corporations, Chapter 4 in Handbook of the Economics of Finance, Vol. 1A (George M. Constantinides, Milton Harris, and René M. Stulz editors, 2003); Milton Harris and Arthur Raviv, , 46 J. Finance 297 (1991). See also Michael J. Barclay and Clifford W. Smith, Jr., , 50 J. Finance 899 (1995)(data on relative amounts of “capitalized” leases (roughly speaking, leases for most of the life of the asset), secured debt, ordinary debt, subordinated debt, and preferred stock in capital structures of large sample of corporations). A sophisticated analysis of capital structure would also include consideration of the particularized terms, or forms, of financial instruments such as common stock and bonds—that is, it would relax the useful...
- The same point can perhaps be made with even greater force and simplicity if we take an investor perspective, by imagining a corporation with a single investor whose tax rate is significantly higher than that of the corporation. If the corporation has opportunities for expansion, then, depending on the rate differential and the period of retention (and corresponding deferral of the individual tax), it may be advantageous to finance with equity rather than debt in order to take advantage of the immunity of retained earnings from individual taxation; the investor may prefer retained earnings taxed at the corporate rate to interest taxed at the individual rate. If, on the other hand, the firm has no attractive investment opportunities and therefore contemplates distribution of its earnings, it should be financed heavily with debt in order to minimize the corporate tax. The more general point is that capital-structure strategy will obviously depend in large part on the investment...
- Imagine the following facts: An individual has the opportunity to invest in a project that will cost $100,000 and has an expected annual return of $12,000, before tax. The individual will invest $50,000 of his own funds and will borrow $50,000 at 8 percent. The project will be held in corporate form and the lender is willing to lend either to the corporation or to the individual, nonrecourse, with the shares of the corporation as security for the loan. Thus, there are two financing possibilities. The corporation can be financed, formally, only with equity supplied by its sole shareholder partly with his own funds and partly with borrowed funds. Or the corporation can issue 50–50 debt and equity, with the individual investor owning the equity and the corporation incurring the debt. Assume that the corporate tax rate is 50 percent, and that the individual tax rate on interest and dividends is 70 ...and on capital gain is 30 percent. All earnings of the corporation, after payment of...
- . Investment decisions must be based on cost of capital, without regard to short-run decisions affecting capital structure. A new project may be financed by retained earnings or by the sale of new debt or equity. In determining whether the project is a good investment, the corresponding decision on the best source of financing is irrelevant—the investment decision must be based on the weighted average cost of capital. To prove this point, suppose that a project under consideration is expected to produce a return of 12 percent and that new money must be raised to finance it; that the cost of debt is 10 percent and the cost of equity is 20 percent with a 1:1 ratio. Suppose that a decision has been made to sell bonds, whose cost is 10 percent. Does that mean that the project, yielding 12 percent, is a worthwhile investment? Of course not. Imagine that the next project that comes along will produce a return of 14 percent but that at the time, the sound financing decision would be to...
- Now suppose that you have decided that you want to acquire only one investment. Does it make sense to use only $50,000 of your own money and borrow the other $50,000 to finance that investment? The answer is plainly, “no.” If you did so, you would be borrowing at 8 percent while you were lending at 6 percent. You would have the apparent advantage of leverage but the leverage would be spurious because your position as a debtor would be offset by your position as a creditor. Your expected return on the risky investment would be $8,000 ($12,000 less interest of $4,000 on the $50,000 loan). That would be a 16 percent rate of return on your $50,000 equity in that investment. At the same time, however, your return on your savings and loan account would be only $3,000 (6 percent of the $50,000). Your total net expected return would be $11,000 ($8,000 plus $3,000) or 11 percent. You would obviously be better off to take your entire $100,000 out of the bank and use it to acquire the risky...
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Copyright Page 2 results
- This publication was created to provide you with accurate and authoritative information concerning the subject matter covered; however, this publication was not necessarily prepared by persons licensed to practice law in a particular jurisdiction. The publisher is not engaged in rendering legal or other professional advice and this publication is not a substitute for the advice of an attorney. If you require legal or other expert advice, you should seek the services of a competent attorney or other professional.
- © 2010 By THOMSON REUTERS/FOUNDATION PRESS
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Table of Contents 130 results (showing 5 best matches)
Summary of Contents 30 results (showing 5 best matches)
- Market Efficiency and Behavioral Finance
- Organization Within Firms and Across Markets
- CHAPTER 4 BASIC CORPORATE INVESTMENT DEVICES: ECONOMIC ATTRIBUTES AND FORMAL CHARACTERISTICS
- Owners and Managerial Employees: Control, Risk, and Duration of Relationship
- A Slice of Financial History: ‘‘Watered Stock’’ and Its Lessons in Fraud
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- Publication Date: April 26th, 2010
- ISBN: 9781599414492
- Subject: Business Organizations
- Series: Concepts and Insights
- Type: Hornbook Treatises
- Description: This authoritative text explains the basic economic elements and legal principles of business organization and finance.
