Question 1

The board of directors may grant stock options to managers in order to

Accepted Answer

A) save executive compensation costs. 
B) use as a substitute for bonus. 
C) align the interest of managers with that of shareholders. 
D) none of the above 
A) save executive compensation costs. 
B) use as a substitute for bonus. 
C) align the interest of managers with that of shareholders. 
D) none of the above

Question 2

If an incentive contract specifies certain accounting performance

Accepted Answer

A) that accounting number will likely be the focus of managers. 
B) managers will set aside the accounting goal if it conflicts with the goal of maximizing shareholder wealth. 
C) managers will be unable to manipulate the GAAP, so shareholders can be confident of having their wealth maximized. 
A) that accounting number will likely be the focus of managers. 
B) managers will set aside the accounting goal if it conflicts with the goal of maximizing shareholder wealth. 
C) managers will be unable to manipulate the GAAP, so shareholders can be confident of having their wealth maximized.

Question 3

In the United Kingdom, the majority of public companies

Accepted Answer

A) voluntarily abide by the Code of Best Practice on corporate governance. 
B) are compelled by law to abide by the Code of Best Practice on corporate governance. 
C) do not abide by the Code of Best Practice on corporate governance. 
A) voluntarily abide by the Code of Best Practice on corporate governance. 
B) are compelled by law to abide by the Code of Best Practice on corporate governance. 
C) do not abide by the Code of Best Practice on corporate governance.

Question 4

The agency problem tends

Accepted Answer

A) to be more serious in firms with free cash flows. 
B) to be more serious in firms with excessive amounts of excess cash. 
C) to be less serious in firms with few numbers of shareholders. 
D) all of the above 
A) to be more serious in firms with free cash flows. 
B) to be more serious in firms with excessive amounts of excess cash. 
C) to be less serious in firms with few numbers of shareholders. 
D) all of the above

Question 5

Unless investors can derive significant private benefits of control,

Accepted Answer

A) they will pay small premiums for voting shares over nonvoting shares. 
B) they will pay moderate premiums for voting shares over nonvoting shares. 
C) they will pay substantial premiums for voting shares over nonvoting shares. 
D) they will not pay substantial premiums for voting shares over nonvoting shares. 
A) they will pay small premiums for voting shares over nonvoting shares. 
B) they will pay moderate premiums for voting shares over nonvoting shares. 
C) they will pay substantial premiums for voting shares over nonvoting shares. 
D) they will not pay substantial premiums for voting shares over nonvoting shares.

Question 6

Managerial entrenchment efforts are clear signs of the agency problem. They include

Accepted Answer

A) anti-takeover defenses. 
B) poison pills. 
C) changes in the voting procedures to make it more difficult for the firm to be taken over. 
D) all of the above 
A) anti-takeover defenses. 
B) poison pills. 
C) changes in the voting procedures to make it more difficult for the firm to be taken over. 
D) all of the above

Question 7

In Germany the corporate board is

Accepted Answer

A) legally charged with representing the interests of shareholders exclusively. 
B) legally charged with looking after the interests of stakeholders (e.g., workers, creditors, etc.) in general, not just shareholders. 
C) legally charged as a supervisory board only. 
D) legally charged as a management board only. 
A) legally charged with representing the interests of shareholders exclusively. 
B) legally charged with looking after the interests of stakeholders (e.g., workers, creditors, etc.) in general, not just shareholders. 
C) legally charged as a supervisory board only. 
D) legally charged as a management board only.

Question 8

It is important for society as a whole to solve the agency problem, since the agency problem

Accepted Answer

A) leads to waste of scarce resources. 
B) hampers capital market functions. 
C) retards economic growth. 
D) all of the above 
A) leads to waste of scarce resources. 
B) hampers capital market functions. 
C) retards economic growth. 
D) all of the above

Question 9

While debt can reduce agency costs between shareholders and management,

Accepted Answer

A) debt can create its own agency costs. 
B) this only happens at extreme levels of debt. 
C) this does not work for firms in mature industries with large cash reserves. 
D) none of the above is true 
A) debt can create its own agency costs. 
B) this only happens at extreme levels of debt. 
C) this does not work for firms in mature industries with large cash reserves. 
D) none of the above is true

Question 10

A complete contract between shareholders and managers

Accepted Answer

A) would specify exactly what the manager will do under each of all possible future contingencies. 
B) would be an expensive contract to write and a very expensive contract to monitor. 
C) would eliminate any conflicts of interest (and managerial discretion). 
D) all of the above 
A) would specify exactly what the manager will do under each of all possible future contingencies. 
B) would be an expensive contract to write and a very expensive contract to monitor. 
C) would eliminate any conflicts of interest (and managerial discretion). 
D) all of the above

Question 11

Following the adoption of the Cadbury Code of Best practice,

Accepted Answer

A) joint CEO/COB (chief executive officer and chairman of the board) positions declined. 
B) there has been a significant impact on the internal governance mechanisms of U.K. companies. 
C) CEOs have become more sensitive to company performance, strengthening managerial accountability and weakening managerial entrenchment. 
D) all of the above 
A) joint CEO/COB (chief executive officer and chairman of the board) positions declined. 
B) there has been a significant impact on the internal governance mechanisms of U.K. companies. 
C) CEOs have become more sensitive to company performance, strengthening managerial accountability and weakening managerial entrenchment. 
D) all of the above

Question 12

Financial development can contribute to economic growth in what way(s)?

Accepted Answer

A) Financial development enhances savings. 
B) Financial development channels savings toward real investments in productive capacities. 
C) Financial development enhances the efficiency of investment allocation through the monitoring and signaling functions of capital markets. 
D) All of the above 
A) Financial development enhances savings. 
B) Financial development channels savings toward real investments in productive capacities. 
C) Financial development enhances the efficiency of investment allocation through the monitoring and signaling functions of capital markets. 
D) All of the above

Question 13

In the U.S., corporate governance reform has included all of the following except:

Accepted Answer

A) strengthen the independence of boards of directors. 
B) enhancing the transparency and disclosure of financial statements. 
C) energizing the regulatory an monitoring functions of the SEC. 
D) requiring auditors to sit on the boards of directors. 
A) strengthen the independence of boards of directors. 
B) enhancing the transparency and disclosure of financial statements. 
C) energizing the regulatory an monitoring functions of the SEC. 
D) requiring auditors to sit on the boards of directors.

Question 14

Concentrated ownership of a public company

Accepted Answer

A) is normal in the United States, following the well-publicized scandals of recent years. 
B) is relatively rare in the United States and common in many other parts of the world. 
C) leads to a free-rider problem with the minority shareholders relying on the majority shareholders to assume an undue burden in monitoring the management. 
D) is the norm in Great Britain. 
A) is normal in the United States, following the well-publicized scandals of recent years. 
B) is relatively rare in the United States and common in many other parts of the world. 
C) leads to a free-rider problem with the minority shareholders relying on the majority shareholders to assume an undue burden in monitoring the management. 
D) is the norm in Great Britain.

Question 15

Many companies issue shares with differential voting rights, deviating from the one-share one-vote principle.

Accepted Answer

A) By accumulating superior voting shares, investors can acquire cash flow rights exceeding control rights. 
B) The price of the voting shares is usually twice the price of the voting shares. 
C) By accumulating superior voting shares, investors can acquire control rights exceeding cash flow rights. 
D) None of the above 
A) By accumulating superior voting shares, investors can acquire cash flow rights exceeding control rights. 
B) The price of the voting shares is usually twice the price of the voting shares. 
C) By accumulating superior voting shares, investors can acquire control rights exceeding cash flow rights. 
D) None of the above

Question 16

While debt can reduce agency costs between shareholders and management,

Accepted Answer

A) excessive debt may also induce the risk-averse managers to forgo profitable but risky investment projects, causing an underinvestment problem. 
B) with debt financing companies can misuse debt to finance corporate empire building. 
C) both a and b 
D) none of the above 
A) excessive debt may also induce the risk-averse managers to forgo profitable but risky investment projects, causing an underinvestment problem. 
B) with debt financing companies can misuse debt to finance corporate empire building. 
C) both a and b 
D) none of the above

Question 17

Suppose you are the CEO of company A, and you serve on the board of company B, while the CEO of B is on your board.

Accepted Answer

A) This is a potential conflict of interest for both parties. 
B) This is normal and even a desirable situation since it allows for efficient information sharing between the firms. 
C) There is a potential conflict for the shareholders of the two firms. 
D) All of the above are true. 
A) This is a potential conflict of interest for both parties. 
B) This is normal and even a desirable situation since it allows for efficient information sharing between the firms. 
C) There is a potential conflict for the shareholders of the two firms. 
D) All of the above are true.

Question 18

A pyramidal ownership structure is one in which

Accepted Answer

A) a shareholder controls a holding company that owns a controlling block of another company, which in turn owns controlling interests in yet another company, and so on. 
B) equity cross-holdings among a group of companies, such as keiretsu and chaebols can be used to concentrate and leverage voting rights to acquire control. 
C) a combination of these schemes may also be used to leverage control in a pyramidal ownership structure. 
A) a shareholder controls a holding company that owns a controlling block of another company, which in turn owns controlling interests in yet another company, and so on. 
B) equity cross-holdings among a group of companies, such as keiretsu and chaebols can be used to concentrate and leverage voting rights to acquire control. 
C) a combination of these schemes may also be used to leverage control in a pyramidal ownership structure.

Question 19

Tobin's Q is

Accepted Answer

A) the ratio of the market value of company assets to the replacement costs of the assets. 
B) a means to find overvalued stocks: if Q is high it means that the cost to replace a firm's assets is greater than the value of its stock. 
C) the same as the price-to-book ratio. 
D) Both a and b are correct 
A) the ratio of the market value of company assets to the replacement costs of the assets. 
B) a means to find overvalued stocks: if Q is high it means that the cost to replace a firm's assets is greater than the value of its stock. 
C) the same as the price-to-book ratio. 
D) Both a and b are correct

Question 20

In the graph at right, X, Y, and Z represent

Accepted Answer

A) entrenchment, alignment, entrenchment. 
B) alignment, entrenchment, alignment. 
C) misalignment and alignment. 
D) agency costs of debt and equity. 
A) entrenchment, alignment, entrenchment. 
B) alignment, entrenchment, alignment. 
C) misalignment and alignment. 
D) agency costs of debt and equity.

Exam 4: Corporate Governance Around the World

The board of directors may grant stock options to managers in order to

If an incentive contract specifies certain accounting performance

In the United Kingdom, the majority of public companies

The agency problem tends

Unless investors can derive significant private benefits of control,

Managerial entrenchment efforts are clear signs of the agency problem. They include

In Germany the corporate board is

It is important for society as a whole to solve the agency problem, since the agency problem

While debt can reduce agency costs between shareholders and management,

A complete contract between shareholders and managers

Following the adoption of the Cadbury Code of Best practice,

Financial development can contribute to economic growth in what way(s)?

In the U.S., corporate governance reform has included all of the following except:

Concentrated ownership of a public company

Many companies issue shares with differential voting rights, deviating from the one-share one-vote principle.

While debt can reduce agency costs between shareholders and management,

Suppose you are the CEO of company A, and you serve on the board of company B, while the CEO of B is on your board.

A pyramidal ownership structure is one in which

Tobin's Q is

In the graph at right, X, Y, and Z represent

Globalization and the Multinational Firm

International Monetary System

Balance of Payments

The Market for Foreign Exchange

International Parity Relationships and Forecasting Foreign Exchange Rates

Futures and Options on Foreign Exchange

Management of Transaction Exposure

Management of Economic Exposure

Management of Translation Exposure

International Banking and Money Market

International Bond Market

International Equity Markets

Interest Rate and Currency Swaps

International Portfolio Investment

Foreign Direct Investment and Cross-Border Acquisitions

International Capital Structure and the Cost of Capital

International Capital Budgeting

Multinational Cash Management

International Trade Finance

International Tax Environment and Transfer Pricing

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