Exam 7: The Role of Financial Information in Contracting

A factor that can reduce managers' short-term focus is the fact that incentive compensation plans are administered by a compensation committee that can intervene when circumstances warrant modification of the scheduled incentive award.

Some companies have adopted formal "compensation recovery" policies whereby executives forfeit various incentive payments if it is later discovered that they engaged in conduct detrimental to the company.

Covenants restricting the use of funds for dividend payments,share repurchases,capital expenditures,and other business purposes are included so the creditor has greater assurance that cash will be available to make principal and interest payments when due.

Contracting parties understand that financial reporting flexibility affects how contracts are written and enforced.

In the banking industry,the ratio of invested capital/gross assets,as defined by RAP,is the capital asset ratio.

Firms are required to disclose executive retirement and other postemployment compensation,generally for the ten most highly paid executives serving as corporate officers.

A compensation committee should be comprised of

Banking regulators have a powerful weapon to encourage compliance with minimum capital guidelines as they can impose costs on noncomplying banks by doing any or all of the following except

Several studies show that incoming CEOs have an incentive to

Firms are rewarded for reporting continuous growth in annual EPS.

Financial accounting numbers can be used to define contract terms and monitor compliance with contract terms.

Potential conflicts of interest between shareholders and managers may be overcome if managers are given incentives which cause them to behave as if they were

A financial covenant would stipulate all of the following except

Compensation incentives that motivate and reward executives for five years of growth and prosperity are called

Most executive compensation packages involve a base salary,an annual incentive,and a long-term incentive.

A decrease in market-wide interest rates will result in a/an

When a borrower is unable to make a scheduled interest payment,the type of default that occurs is a

Stock options come in various forms,the choice of which is largely dependent on the tax treatment for the executive and the company.

Some debt covenants preserve repayment capacity by preventing mergers and acquisitions unless the debt is first repaid.

It is possible to lower the interest rate on a loan by accepting more stringent loan covenant restrictions.