Exam 18: Organization Structure and Corporate Governance

Rate of return regulation tends to reduce:

Coase Theorem. Suppose a power plant reduced recreational opportunities by fouling a nearby river. A natural result would be for local environmentalists and consumers to petition local authorities for regulations outlawing or severely limiting such anti-social behavior. On the other hand, others might argue that there exist efficient and effective private-market solutions to such pollution problems. A. What is the Coase Theorem? B. Use the Coase Theorem to explain how the private sector might efficiently deal with pollution problems.

Horizontal and Vertical Relations. Barnes & Noble, Inc. is one of the world's largest booksellers. The company's principal business is the retail sale of trade books, generally hardcover and paperback consumer titles, excluding educational textbooks and specialized religious titles, mass market paperbacks, such as mystery, romance, science fiction and other popular fiction, children's books, off-price bargain books and magazines. Borders Group, Inc. is one of the largest operators of book superstores and mall-based bookstores in the world based upon both sales and number of stores. Borders is a premier operator of book and music superstores, offering customers selection and service that the company believes to be superior to other book superstore operators. Each Borders superstore offers customers a vast assortment of books, customer service, value pricing and an inviting and comfortable environment designed to encourage browsing. A. Do Barnes & Noble and Borders share important elements of a vertical relationship? If so, how? B. Do Barnes & Noble and Borders share important elements of a horizontal relationship? If so, how?

The Sarbanes-Oxley Act does not significantly tighten accountability standards for:

Other Peoples' Money Problem. In 2008, France's Société Générale SA said that a 31-year-old trader named Jérôme Kerviel had cost the bank €4.9 billion (equivalent to $7.2 billion) by making huge unauthorized trades. Société Générale's loss dwarfed the $1.3 billion Nick Leeson cost Britain's Barings Bank in 1995, and forced Société Générale to seek a capital infusion of as much as €5.5 billion ($8 billion). Société Générale's loss was only one of many huge write offs tied to a general breakdown in risk controls at gigantic international financial institutions. In 2007-08, giant financial institutions around the world lost billions of dollars on complex financial instruments tied to subprime mortgages and various poorly designed trading strategies. Such losses had important and far-reaching economic ramifications. For example, Société Générale's frantic efforts to unwind Kerviel's unauthorized trades over a 72-hour period rattled global financial markets, and spurred dramatic moves by the Federal Reserve Board's Ben Bernanke to cut U.S. interest rates and head off a deep economic recession. A. Explain this Société Générale bank episode as a manifestation of the "other peoples' money" problem. B. How could it have been avoided?

Horizontal and Vertical Relations. Dell Computer Corp. designs, develops, manufactures, markets, services and supports a wide range of computer systems, including desktops, notebooks and network servers, and also markets software, peripherals and service and support programs. They are the world's leading direct computer systems company and one of the top five computer vendors in the world. Compaq Computer Corp. designs, develops, manufactures, and markets a wide range of personal computing products, including desktop personal computers, portable computers, PC servers and peripheral products that store and manage data in network environments. The company markets its products primarily to business, home, government, and education customers. Compaq operates in one principal industry segment across geographically diverse markets. A. Do Dell and Compaq share important elements of a vertical relationship? If so, how? B. Do Dell and Compaq share important elements of a horizontal relationship? If so, how?

The inefficient preference for stable performance is called the:

A franchise agreement is:

Virtual Corporation. Cendant Corporation provides travel and real estate services primarily in the United States and the United Kingdom. It operates in six segments: Real Estate Franchise and Operations, Hospitality Services, Travel Distribution Services, Vehicle Services, Mortgage Services, and Marketing Services. The Real Estate Franchise and Operations segment franchises the real estate brokerage businesses, provides real estate brokerage services, and assists in employee relocations through Cendant Mobility. Cendants's Hospitality Services segment operates eight lodging franchise systems; facilitates the sale, exchange, and development of time-share vacation ownership interests; and markets and manages vacation rental properties. The Travel Distribution Services segment provides travel content and services to consumers, travel agencies, corporations, and suppliers of travel products and services. The Vehicle Services segment operates and franchises its Avis and Budget vehicle rental businesses. Mortgage Services provides home buyers with mortgage lending services and title, appraisal, and closing services. And finally, the Marketing Services segment provides membership, loyalty, and insurance-based products and services to financial institutions and other partners. A. What is the Coase Theorem? B. Use the Coase Theorem to explain Cendant's recent operating and stock-market success.

The merger between Proctor & Gamble, maker of products like Tide, Crest, and Pampers, and Gillette, the Boston-based maker of razors and batteries, was a:

Ownership value derived from the ability to control the type of output produced gives rise to high:

Corporate Governance. In a fully informed stock market, news regarding the enforcement of federal laws against publicly traded firms would have no effect on target firm stock prices. A "rational expectations hypothesis" predicts that investors would be unaffected by announcements concerning the enforcement actions of federal agencies because current stock prices accurately reflect discounted future cash flows based upon all relevant information. An absence of announcement effects tied to federal law enforcement actions would suggest that the market is fully aware of illegal activity, the probability of getting caught, and the potential sanctions tied to detection and conviction. Future cash flows lost following federal law enforcement actions can include the costs of sacrificing illegal advantages over competitors, investigation expenditures, litigation expenses, and lost reputational capital. An absence of abnormal returns tied to federal law enforcement actions does not mean that there is no cost to being caught; it simply implies that the market correctly anticipates the magnitude and probability of such costs. Here it is important to recognize that the term "caught" does not necessarily imply guilt as well. Under the rational expectations hypothesis, market participants also know the probability of innocent firms being investigated or sued. A. How would you interpret positive stock-price effects tied to public announcements regarding the enforcement actions of federal agencies? B. Conversely, how would you interpret negative stock-price effects tied to public announcements regarding the enforcement actions of federal agencies?

The managerial myopia problem:

The emerging business use of the Internet increases:

Enforcement costs are:

Incentive Compensation. Salary and bonus payments tied to short-term performance often constitute a large part of the annual total compensation package earned by top management. Thus, top managers, like the chief executive officer (CEO), typically have huge personal incentives to turn in favorable year-to-year growth in revenues, profits and earnings per share. This can sometimes have the unfortunate effect of focusing managerial attention on near-term accounting performance to the detriment of long-term value maximization. A. Explain some tools companies use to combat such myopic behavior. B. Explain why a stock-option plan might be very appropriate for the CEO, but inappropriate for workers in general.

Transactions Costs. Centex Corp. is one of the nation's largest home builders, building and delivering, through its subsidiary Centex Homes, over 10,000 homes per year. Centex's housing operations currently involve the construction and sale of single-family and multi-family homes in over 50 different markets nationwide. These activities also include the purchase and development of land. A. Use transactions costs to explain the existence of firms like Centex. B. When will less formal contracting arrangements supplant the need for a formal corporate structure?

End-of-game Problem. One of the most vexing problems facing boards of directors and stockholders is the so-called "end-of-game" problem. A. What is it? B. How do firms efficiently deal with such difficulties?

Bank debt financing has control implications most similar to:

A reasonable before-the-fact forecast of monetary implications describes: