Question 1

Which of the following statements is FALSE?

Accepted Answer

A) The conflict of interest between managers and investors derives from the separation of ownership and control in a corporation. 
B) Any discussion of corporate controls-the system of controls,regulations,and incentives designed to prevent fraud-is a story of conflicts of interest and attempts to minimize them. 
C) Once control and ownership are separated a conflict of interest arises between the owners and the people in control of a corporation. 
D) The separation of ownership and control is perhaps the most important reason for the success of the corporate organizational form.Because any investor can hold an ownership stake in a corporation,investors are able to diversify and thus,with no costs,reduce their risk exposures. 
A) The conflict of interest between managers and investors derives from the separation of ownership and control in a corporation. 
B) Any discussion of corporate controls-the system of controls,regulations,and incentives designed to prevent fraud-is a story of conflicts of interest and attempts to minimize them. 
C) Once control and ownership are separated a conflict of interest arises between the owners and the people in control of a corporation. 
D) The separation of ownership and control is perhaps the most important reason for the success of the corporate organizational form.Because any investor can hold an ownership stake in a corporation,investors are able to diversify and thus,with no costs,reduce their risk exposures. B

Question 2

Which of the following statements regarding incentives to mitigate the conflicts of interest in a corporation is FALSE?

Accepted Answer

A) The incentives come from owning stock in the company and from compensation that is sensitive to performance. 
B) The role of the corporate governance system is to mitigate the conflict of interest that results from the combination of ownership and control without unduly burdening managers with the risk of the firm. 
C) Punishment comes when a board fires a manager for poor performance or fraud,or when,upon failure of the board to act,shareholders or raiders launch control contests to replace the board and management. 
D) The corporate governance system attempts to align interests by providing incentives for taking the right action and punishments for taking the wrong action. 
A) The incentives come from owning stock in the company and from compensation that is sensitive to performance. 
B) The role of the corporate governance system is to mitigate the conflict of interest that results from the combination of ownership and control without unduly burdening managers with the risk of the firm. 
C) Punishment comes when a board fires a manager for poor performance or fraud,or when,upon failure of the board to act,shareholders or raiders launch control contests to replace the board and management. 
D) The corporate governance system attempts to align interests by providing incentives for taking the right action and punishments for taking the wrong action. B

Question 3

Regarding board size,researchers have found that:

Accepted Answer

A) smaller boards are associated with greater firm value and performance,since small groups make better decisions than larger groups. 
B) smaller boards are associated with lower firm value and performance,since small groups are more likely to be compromised by connections to management. 
C) larger boards are associated with greater firm value and performance,since larger boards tend to have directors with a more diverse range of backgrounds and talents. 
D) larger boards are associated with lower firm value and performance,since larger groups are more likely to be compromised by connections to management. 
A) smaller boards are associated with greater firm value and performance,since small groups make better decisions than larger groups. 
B) smaller boards are associated with lower firm value and performance,since small groups are more likely to be compromised by connections to management. 
C) larger boards are associated with greater firm value and performance,since larger boards tend to have directors with a more diverse range of backgrounds and talents. 
D) larger boards are associated with lower firm value and performance,since larger groups are more likely to be compromised by connections to management. A

Question 4

Which of the following statements regarding shareholder actions is FALSE?

Accepted Answer

A) If managers have large ownership stakes,then shareholders are more likely to use compensation policies or a stronger board to create the desired incentives. 
B) If all else fails,the shareholders' last line of defense against expropriation by self-interested managers is direct action. 
C) A shareholder resolution could direct the board to take a specific action,such as discontinue investing in a particular line of business or country,or remove a poison pill. 
D) Any shareholder can submit a resolution that is put to a vote at the annual meeting. 
A) If managers have large ownership stakes,then shareholders are more likely to use compensation policies or a stronger board to create the desired incentives. 
B) If all else fails,the shareholders' last line of defense against expropriation by self-interested managers is direct action. 
C) A shareholder resolution could direct the board to take a specific action,such as discontinue investing in a particular line of business or country,or remove a poison pill. 
D) Any shareholder can submit a resolution that is put to a vote at the annual meeting.

Question 5

Which of the following statements is FALSE?

Accepted Answer

A) Researchers have hypothesized that boards with a majority of outside directors are better monitors of managerial effort and actions. 
B) Studies have found that firms with independent boards make fewer value-creating acquisitions but are more likely to act in shareholders' interests if targeted in an acquisition. 
C) One early study showed that a board was more likely to fire the firm's CEO for poor performance if the board had a majority of outside directors. 
D) Although the firm's stock price increases on the announcement of the addition of an independent board member,the increased firm value appears to come from the potential for the board to make better decisions on acquisitions and CEO turnover rather than from improvements in the firm's operating performance. 
A) Researchers have hypothesized that boards with a majority of outside directors are better monitors of managerial effort and actions. 
B) Studies have found that firms with independent boards make fewer value-creating acquisitions but are more likely to act in shareholders' interests if targeted in an acquisition. 
C) One early study showed that a board was more likely to fire the firm's CEO for poor performance if the board had a majority of outside directors. 
D) Although the firm's stock price increases on the announcement of the addition of an independent board member,the increased firm value appears to come from the potential for the board to make better decisions on acquisitions and CEO turnover rather than from improvements in the firm's operating performance.

Question 6

Directors who are not employees,former employees,or family members of employees and who do not have existing or potential business relationships with the firm are called:

Accepted Answer

A) monitoring directors. 
B) independent directors. 
C) gray directors. 
D) inside directors. 
A) monitoring directors. 
B) independent directors. 
C) gray directors. 
D) inside directors.

Question 7

Which of the following statements is FALSE?

Accepted Answer

A) Controlling shareholders pay for their control rights because the firm effectively faces a higher cost of equity for outside capital. 
B) Most countries follow what is called the stakeholder model,giving explicit consideration to other stakeholders-in particular,rank-and-file employees. 
C) In a pyramid structure,a family first creates a company in which it owns more than 50% of the shares and therefore has a controlling interest. 
D) A conflict of interest arises because the family has an incentive to try to move profits (and hence dividends)down the pyramid-that is,toward companies in which it has few cash flow rights and away from firms in which it has more cash flow rights. 
A) Controlling shareholders pay for their control rights because the firm effectively faces a higher cost of equity for outside capital. 
B) Most countries follow what is called the stakeholder model,giving explicit consideration to other stakeholders-in particular,rank-and-file employees. 
C) In a pyramid structure,a family first creates a company in which it owns more than 50% of the shares and therefore has a controlling interest. 
D) A conflict of interest arises because the family has an incentive to try to move profits (and hence dividends)down the pyramid-that is,toward companies in which it has few cash flow rights and away from firms in which it has more cash flow rights.

Question 8

Which of the following statements is FALSE?

Accepted Answer

A) When the CEO is also chairman of the board,the nominating letter offering a seat to a new director comes from her.This process merely serves to reinforce the sense that the outside directors owe their positions to the CEO and work for the CEO rather than for the shareholders. 
B) Over time,most of the independent directors will have been nominated by the CEO.Even though they have no business ties to the firm,they are still likely to be friends or at least acquaintances of the CEO. 
C) Researchers have found the surprisingly robust result that larger boards are associated with greater firm value and performance. 
D) The CEO can be expected to stack the board with directors who are less likely to challenge her. 
A) When the CEO is also chairman of the board,the nominating letter offering a seat to a new director comes from her.This process merely serves to reinforce the sense that the outside directors owe their positions to the CEO and work for the CEO rather than for the shareholders. 
B) Over time,most of the independent directors will have been nominated by the CEO.Even though they have no business ties to the firm,they are still likely to be friends or at least acquaintances of the CEO. 
C) Researchers have found the surprisingly robust result that larger boards are associated with greater firm value and performance. 
D) The CEO can be expected to stack the board with directors who are less likely to challenge her.

Question 9

Which of the following was NOT a finding of the Cadbury Commission?

Accepted Answer

A) Audit and compensation committees should be made up entirely of independent directors or,at least,have a majority of them. 
B) Auditors should be rotated,and there should be fuller disclosure of non-audit work. 
C) The CEO should not be chairman of the board,and at the very least there should be a lead independent director with similar agenda-setting powers. 
D) The CEO and the CFO should personally attest to the accuracy of the financial statements presented to shareholders. 
A) Audit and compensation committees should be made up entirely of independent directors or,at least,have a majority of them. 
B) Auditors should be rotated,and there should be fuller disclosure of non-audit work. 
C) The CEO should not be chairman of the board,and at the very least there should be a lead independent director with similar agenda-setting powers. 
D) The CEO and the CFO should personally attest to the accuracy of the financial statements presented to shareholders.

Question 10

Which of the following statements is FALSE?

Accepted Answer

A) The Cadbury Commission stiffened the criminal penalties for providing false information to shareholders. 
B) The Exchange Acts of 1933 and 1934,among other things,established the Securities and Exchange Commission (SE
C) and prohibited trading on private information gained as an insider of a firm. 
C) Many of the problems at Enron,WorldCom,and elsewhere were kept hidden from boards and shareholders until it was too late.In the wake of these scandals,many people felt that the accounting statements of these companies,while often remaining true to the letter of GAAP,did not present an accurate picture of the financial health of a company. 
D) While one study found that those firms that separated the position of CEO and chairman performed better,another found no relation between the independence of key board committees and firm performance in the post-Cadbury era. 
A) The Cadbury Commission stiffened the criminal penalties for providing false information to shareholders. 
B) The Exchange Acts of 1933 and 1934,among other things,established the Securities and Exchange Commission (SE
C) and prohibited trading on private information gained as an insider of a firm. 
C) Many of the problems at Enron,WorldCom,and elsewhere were kept hidden from boards and shareholders until it was too late.In the wake of these scandals,many people felt that the accounting statements of these companies,while often remaining true to the letter of GAAP,did not present an accurate picture of the financial health of a company. 
D) While one study found that those firms that separated the position of CEO and chairman performed better,another found no relation between the independence of key board committees and firm performance in the post-Cadbury era.

Question 11

How does a pyramid structure work?

Accepted Answer

In a pyramid structure,a family first cr

Question 12

Backdating refers to:

Accepted Answer

A) choosing the strike price of a stock option retroactively. 
B) choosing the exercise date of the stock option retroactively. 
C) choosing the share conversion ratio retroactively. 
D) choosing the grant date of a stock option retroactively. 
A) choosing the strike price of a stock option retroactively. 
B) choosing the exercise date of the stock option retroactively. 
C) choosing the share conversion ratio retroactively. 
D) choosing the grant date of a stock option retroactively.

Question 13

What is the role of takeovers in corporate governance?

Accepted Answer

When internal governance systems such as

Question 14

What are some of the negative effects of increasing the sensitivity of managerial pay to firm performance?

Accepted Answer

Increasing the pay-for-performance sensi

Question 15

While the Sarbanes-Oxley Act (SOX)contains many provisions,the overall intent of the legislation was to improve the accuracy of information given to both boards and to shareholders.SOX attempted to achieve this goal in all of the following ways,EXCEPT:

Accepted Answer

A) overhauling incentives and independence in the auditing process. 
B) mandating the separation of the positions of CEO and Chairman of the Board. 
C) stiffening penalties for providing false information. 
D) forcing companies to validate their internal financial control processes. 
A) overhauling incentives and independence in the auditing process. 
B) mandating the separation of the positions of CEO and Chairman of the Board. 
C) stiffening penalties for providing false information. 
D) forcing companies to validate their internal financial control processes.

Question 16

What is the difference between inside,gray,and outside directors?

Accepted Answer

Inside directors are employees,former em

Question 17

Which of the following statements regarding managerial ownership is FALSE?

Accepted Answer

A) The relationship between managerial ownership and firm value is unlikely to be the same for every firm,or even for different executives of the same firm. 
B) Even with the risk benefits of separating ownership and control,there are still examples of corporations in which the top managers have substantial ownership interests. 
C) Academic studies do not support the notion that greater managerial ownership is associated with fewer value-reducing actions by managers. 
D) While increasing managerial ownership may reduce perquisite consumption,it also makes managers harder to fire-thus reducing the incentive effect of the threat of dismissal. 
A) The relationship between managerial ownership and firm value is unlikely to be the same for every firm,or even for different executives of the same firm. 
B) Even with the risk benefits of separating ownership and control,there are still examples of corporations in which the top managers have substantial ownership interests. 
C) Academic studies do not support the notion that greater managerial ownership is associated with fewer value-reducing actions by managers. 
D) While increasing managerial ownership may reduce perquisite consumption,it also makes managers harder to fire-thus reducing the incentive effect of the threat of dismissal.

Question 18

Dual class shares are best defined as:

Accepted Answer

A) a process where a company issues both common and preferred stock to finance the company. 
B) a scenario in which companies have more than one class of shares and one class has superior voting rights over the other class. 
C) a scenario in which 51% of the shares are held by a holding company which is part of a pyramid structure. 
D) a process where a company issues shares in two separate countries each trading on a separate stock exchange. 
A) a process where a company issues both common and preferred stock to finance the company. 
B) a scenario in which companies have more than one class of shares and one class has superior voting rights over the other class. 
C) a scenario in which 51% of the shares are held by a holding company which is part of a pyramid structure. 
D) a process where a company issues shares in two separate countries each trading on a separate stock exchange.

Question 19

Directors who are employees,former employees,or family members of employees are called:

Accepted Answer

A) managing directors. 
B) independent directors. 
C) inside directors. 
D) gray directors. 
A) managing directors. 
B) independent directors. 
C) inside directors. 
D) gray directors.

Question 20

Which of the following statements is FALSE?

Accepted Answer

A) One study found that during the 1990s firms with fewer restrictions on shareholder power performed worse than firms with more restrictions. 
B) Some large public pension funds,such as CalPERS (the California Public Employees Retirement System),take an activist role in corporate governance. 
C) In 2004 with the Walt Disney Company,major shareholders were dissatisfied with the recent performance of Disney under long-time CEO and Chairman,Michael Eisner.They began an organized campaign to convince the majority of Disney shareholders to withhold their approval of the reelection of Eisner as director and chairman of the board. 
D) Given the importance of shareholder action in corporate governance,researchers and large investors alike have become increasingly interested in measuring the balance of power between shareholders and managers in a firm. 
A) One study found that during the 1990s firms with fewer restrictions on shareholder power performed worse than firms with more restrictions. 
B) Some large public pension funds,such as CalPERS (the California Public Employees Retirement System),take an activist role in corporate governance. 
C) In 2004 with the Walt Disney Company,major shareholders were dissatisfied with the recent performance of Disney under long-time CEO and Chairman,Michael Eisner.They began an organized campaign to convince the majority of Disney shareholders to withhold their approval of the reelection of Eisner as director and chairman of the board. 
D) Given the importance of shareholder action in corporate governance,researchers and large investors alike have become increasingly interested in measuring the balance of power between shareholders and managers in a firm.

Exam 29: Corporate Governance

Which of the following statements is FALSE?

Which of the following statements regarding incentives to mitigate the conflicts of interest in a corporation is FALSE?

Regarding board size,researchers have found that:

Which of the following statements regarding shareholder actions is FALSE?

Which of the following statements is FALSE?

Directors who are not employees,former employees,or family members of employees and who do not have existing or potential business relationships with the firm are called:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following was NOT a finding of the Cadbury Commission?

Which of the following statements is FALSE?

How does a pyramid structure work?

Backdating refers to:

What is the role of takeovers in corporate governance?

What are some of the negative effects of increasing the sensitivity of managerial pay to firm performance?

While the Sarbanes-Oxley Act (SOX)contains many provisions,the overall intent of the legislation was to improve the accuracy of information given to both boards and to shareholders.SOX attempted to achieve this goal in all of the following ways,EXCEPT:

What is the difference between inside,gray,and outside directors?

Which of the following statements regarding managerial ownership is FALSE?

Dual class shares are best defined as:

Directors who are employees,former employees,or family members of employees are called:

Which of the following statements is FALSE?

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Risk Management

International Corporate Finance

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