Question 1

Examples of cross-holdings include: I. Japanese keiretsu

Accepted Answer

A)  I, II, and IV 
B)  I, II, and III 
C)  I and IV 
D)  All of the above are examples of cross-holdings. 
A)  I, II, and IV 
B)  I, II, and III 
C)  I and IV 
D)  All of the above are examples of cross-holdings.

Question 2

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 its 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 its 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 3

Which of the following statements is FALSE?

Accepted Answer

A)  One study found that firms with fewer restrictions on shareholder power performed worse than firms with more restrictions during the 1990s. 
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 firms with fewer restrictions on shareholder power performed worse than firms with more restrictions during the 1990s. 
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.

Question 4

Tammy is a member of the Board of Directors of Moon Corporation. Her husband is the manager of a large division. What type of director is Tammy?

Accepted Answer

A)  inside director 
B)  outside director 
C)  gray director 
D)  resident director 
A)  inside director 
B)  outside director 
C)  gray director 
D)  resident director

Question 5

Which of the following statements 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 6

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 structure-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 structure-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.

Question 7

Which of the following statements is FALSE?

Accepted Answer

A)  Increasing the pay-for-performance sensitivity comes with the added benefit of reducing managers' risk. 
B)  Stock and option grants give managers a direct incentive to increase the stock price to make their stock or options as valuable as possible. 
C)  By tying compensation to performance, the shareholders effectively give the manager an ownership stake in the firm. 
D)  During the 1990s, most companies adopted compensation policies that more directly gave managers an ownership stake by including grants of stock or stock options to executives. 
A)  Increasing the pay-for-performance sensitivity comes with the added benefit of reducing managers' risk. 
B)  Stock and option grants give managers a direct incentive to increase the stock price to make their stock or options as valuable as possible. 
C)  By tying compensation to performance, the shareholders effectively give the manager an ownership stake in the firm. 
D)  During the 1990s, most companies adopted compensation policies that more directly gave managers an ownership stake by including grants of stock or stock options to executives.

Question 8

Directors who are not as directly connected to the firm but who have existing or potential business relationships with the firm are called ________.

Accepted Answer

A)  gray directors 
B)  independent directors 
C)  advising directors 
D)  inside directors 
A)  gray directors 
B)  independent directors 
C)  advising directors 
D)  inside directors

Question 9

Which of the following is an example of an agency problem?

Accepted Answer

A)  managers not working as diligently if they are not the sole owner of the business 
B)  the board of directors firing an incompetent manager 
C)  the manager owning a great deal of stock in the company 
D)  a corporate raider attempting to purchase the company 
A)  managers not working as diligently if they are not the sole owner of the business 
B)  the board of directors firing an incompetent manager 
C)  the manager owning a great deal of stock in the company 
D)  a corporate raider attempting to purchase the company

Question 10

Which of the following statements is FALSE?

Accepted Answer

A)  The United States is somewhat of an exception, in that it focuses solely on maximizing shareholder welfare. 
B)  A controlling family has many opportunities to expropriate minority shareholders in a pyramid structure. 
C)  One way for families to gain control over firms even when they do not own more than half the shares is to issue dual class shares-a scenario in which companies have more than one class of shares and one class has superior voting rights over the other class. 
D)  Researchers have claimed that the degree of investor protection was largely determined by the legal origin of the country-specifically, whether its legal system was based on British common law (less protection) or French, German, and Scandinavian civil law (more protection). 
A)  The United States is somewhat of an exception, in that it focuses solely on maximizing shareholder welfare. 
B)  A controlling family has many opportunities to expropriate minority shareholders in a pyramid structure. 
C)  One way for families to gain control over firms even when they do not own more than half the shares is to issue dual class shares-a scenario in which companies have more than one class of shares and one class has superior voting rights over the other class. 
D)  Researchers have claimed that the degree of investor protection was largely determined by the legal origin of the country-specifically, whether its legal system was based on British common law (less protection) or French, German, and Scandinavian civil law (more protection).

Question 11

Describe the main requirements of the Sarbanes-Oxley Act of 2002.

Accepted Answer

1. Strict limits on the amount of non-au

Question 12

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 13

Having a founder and top executive also be a major shareholder ________.

Accepted Answer

A)  always results in agency conflicts that are bad for minority shareholders 
B)  can sometimes have benefits that outweigh the costs 
C)  is illegal in the U.S. and most other industrialized countries 
D)  is never beneficial to employees 
A)  always results in agency conflicts that are bad for minority shareholders 
B)  can sometimes have benefits that outweigh the costs 
C)  is illegal in the U.S. and most other industrialized countries 
D)  is never beneficial to employees

Question 14

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

Accepted Answer

The answer of What are some of the negative effects...

Question 15

Which of the following statements is FALSE?

Accepted Answer

A)  Backdating refers to the practice of choosing the grant date of a stock option retroactively, so that the date of the grant would coincide with a date when the stock price was at its low for the quarter or for the year. 
B)  Unless it is reported in a timely manner to the IRS and to shareholders, and reflected in the firm's financial statements, backdating is illegal. 
C)  The use of backdating suggests that some executive stock option compensation may not truly have been earned as the result of good future performance of the firm. 
D)  By backdating the option, the executive receives a stock option that is already out-of-the-money, with a strike price equal to the higher price on the supposed grant date. 
A)  Backdating refers to the practice of choosing the grant date of a stock option retroactively, so that the date of the grant would coincide with a date when the stock price was at its low for the quarter or for the year. 
B)  Unless it is reported in a timely manner to the IRS and to shareholders, and reflected in the firm's financial statements, backdating is illegal. 
C)  The use of backdating suggests that some executive stock option compensation may not truly have been earned as the result of good future performance of the firm. 
D)  By backdating the option, the executive receives a stock option that is already out-of-the-money, with a strike price equal to the higher price on the supposed grant date.

Question 16

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 17

Which of the following statements is FALSE?

Accepted Answer

A)  The substantial use of stock and option grants in the 1990s greatly increased managers' pay-for-performance sensitivity. 
B)  The optimal level of sensitivity of managers' compensation to the performance of their firms depends on the managers' level of risk aversion, which is hard to measure. 
C)  While decreasing managers' risk exposure, increasing the sensitivity of managerial pay and wealth to firm performance does have some negative effects. 
D)  In the absence of monitoring, the other way the conflict of interest between managers and owners can be mitigated is by closely aligning their interests through the managers' compensation policy. 
A)  The substantial use of stock and option grants in the 1990s greatly increased managers' pay-for-performance sensitivity. 
B)  The optimal level of sensitivity of managers' compensation to the performance of their firms depends on the managers' level of risk aversion, which is hard to measure. 
C)  While decreasing managers' risk exposure, increasing the sensitivity of managerial pay and wealth to firm performance does have some negative effects. 
D)  In the absence of monitoring, the other way the conflict of interest between managers and owners can be mitigated is by closely aligning their interests through the managers' compensation policy.

Question 18

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 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 firms in which it has more cash flow rights.

Question 19

The costs and benefits of a corporate governance structure ________.

Accepted Answer

A)  are the same in all countries 
B)  are the same for all companies within a country 
C)  depend on cultural norms 
D)  are not important in maximizing shareholder wealth 
A)  are the same in all countries 
B)  are the same for all companies within a country 
C)  depend on cultural norms 
D)  are not important in maximizing shareholder wealth

Question 20

What is the role of takeovers in corporate governance?

Accepted Answer

When internal governance systems such as

Exam 26: Corporate Governance

Examples of cross-holdings include: I. Japanese keiretsu

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Tammy is a member of the Board of Directors of Moon Corporation. Her husband is the manager of a large division. What type of director is Tammy?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Directors who are not as directly connected to the firm but who have existing or potential business relationships with the firm are called ________.

Which of the following is an example of an agency problem?

Which of the following statements is FALSE?

Describe the main requirements of the Sarbanes-Oxley Act of 2002.

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 ________.

Having a founder and top executive also be a major shareholder ________.

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

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

The costs and benefits of a corporate governance structure ________.

What is the role of takeovers in corporate governance?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bonds

Stock Valuation

Investment Decision Rules

Fundamentals of Capital Budgeting

Stock Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modeling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Option Applications and Corporate Finance

Mergers and Acquisitions

International Corporate Finance

Leasing

Insurance and Risk Management

Filters