Chapter 12 Quiz

Which of the following descriptions best exemplifies adverse selection?

A manager cannot ascertain the contributions of individual team members in team production.

Which of the following is true of public stock companies? A. There exists an implicit contract based on trust between society and the public stock company. B. Public stock companies are not required to disclose financial statements. C. The public stock company is not an important institutional arrangement in developing economies. D. Society expects public stock companies to add value to society by making profits for shareholders.

A. There exists an implicit contract based on trust between society and the public stock company.

Which one of the following statements below can best be linked to the Nobel laureate Milton Friedman? A. Corporate social responsibility is absolutely vital to a firm's long-term success. B. The social responsibility of a business is to increase its profits. C. Corporate social responsibility is a universally accepted and practiced principle in domestic markets. D. Corporate social responsibility should be incorporate in MNEs.

B. The social responsibility of a business is to increase its profits.

In terms of agency theory, which of the following is an agency problem? A. shared value B. adverse selection C. corporate social responsibility D. stakeholder strategy

B. adverse selection

Which of the following is a recommended guideline for the composition of a board of directors to implement corporate governance? A. Fortune 500 companies should only hire directors from each other's companies. B. A company's board of directors should not contain more than ten members. C. Close to two-thirds of the board of directors should consist of outside directors. D. The CEO is the best person to act as the chairman or chairwoman of the board.

C. Close to two-thirds of the board of directors should consist of outside directors.

Which of the following is not true concerning corporate governance? A. It seeks to benefit multiple stakeholders, not just shareholders. B. Corporate governance provides a structure for monitoring firm performance. C. Corporate governance exists only in public organizations. D. Corporate governance provides rules for making decisions on corporate affairs.

C. Corporate governance exists only in public organizations.

Which of the following is a problem that corporate governance seeks to address? A. limited liability for investors B. shared-value creation C. the principal-agent problem D. the Ecomagination problem

C. the principal-agent problem

________ is a mechanism to direct and control an enterprise and attempts to address the principal-agent problem, which can occur any time an agent performs activities on behalf of a principal.

Corporate governance

Which of the following is one of the implications of information asymmetry between principals and agents? A. The information comes to all stakeholders simultaneously, which is disadvantageous to the stockholders. B. Principals tend to be better informed than the agents, and thus will avoid delegating decision-making authority to their agents. C. Outsiders, such as shareholders, are the first to learn about important developments, before the information is released to the employees. D. Agents can pass on the information to select principals who can trade stocks based on this information.

D. Agents can pass on the information to select principals who can trade stocks based on this information.

Which of the following real-world examples best exemplifies a shared value creation framework? A. Uber's use of technology to prevent law enforcement from monitoring its drivers B. GE's strategy of developing multiple products for the same purpose and altering its products to suit the culture of different countries C. HP's decision to ask its CEO, Mark Hurd, to resign after he was accused of sexual harassment D. GE's Ecomagination strategy that focuses on providing cleaner and efficient sources of energy while generating billions in revenues

D. GE's Ecomagination strategy that focuses on providing cleaner and efficient sources of energy while generating billions in revenues

Which of the following best exemplifies information asymmetry at Rainholm Industries Inc., a publicly traded software development firm? A. The lower-level employees at Rainholm Industries are often unaware of what happens in boardroom meetings. B. The new CEO of Rainholm Industries implements a new strategy that focuses on social initiatives. C. The shareholders of Rainholm Industries subscribe to Milton Friedman's views of capitalism, while the agents subscribe to Michael Porter's views. D. The board of directors at Rainholm Industries makes significant structural changes to the organization and waits several weeks before issuing a press release about it.

D. The board of directors at Rainholm Industries makes significant structural changes to the organization and waits several weeks before issuing a press release about it.

Why did the San Francisco's Metro Transit Authority (MTA) order Uber to cease and desist?

MTA argued that Uber was operating a taxi service without proper licensing.

What, according to Greg Smith, was the cause for the change in ethical climate within Goldman Sachs?

The company went public and began looking at clients and itself as counter parties to a transaction.

How is the characteristic of separation of legal ownership and management control disadvantageous to publicly traded companies?

The managers delegated to make decisions on behalf of shareholders might pursue their personal interests.

Wayne Enterprises Inc. is a publicly traded company that specializes in manufacturing consumer electronics. Which of the following best exemplifies the implementation of a shared value creation framework at Wayne Enterprises Inc.?

Wayne Enterprises uses recycled materials to create its commercially successful products.

In ________, the stockholders are the legal owners of the company who delegate decision-making authority to professional managers.

public stock companies

In public stock companies, inside directors

are appointed by shareholders to provide the board with necessary company information.

A leveraged buyout (LBO)

changes the ownership structure of a company from public to private.

According to agency theory,

corporations are viewed as a set of legal contracts between different parties.

The risk of employee opportunism, on behalf of agents, is exacerbated by the concept of

information asymmetry.

Donald owns shares of Meat and Bone Steakhouse, a food and beverages company. The company's financial situation takes a turn for the worse and ends up in severe debt. Despite owning shares of Meat and Bone Steakhouse, Donald is not responsible for bringing more money into the company to get it out of its debt. Which characteristic of public stock companies does this scenario best exemplify?

limited liability for investors

Robert works for Duke & Duke Industries, a large corporation. His work requires him to travel extensively and, as a result, he spends much time working remotely. Taking advantage of the situation, Robert often works on personal projects instead of company projects. Duke & Duke Industries has difficulty checking on Robert's work because he has no supervision in many of the places where he travels. This scenario exemplifies a(n)

moral hazard.

One of the major differences between inside directors and outside directors of a company is that outside directors are more likely to

watch out for the interests of the shareholders of the company.

Michael Porter is in favor of the shared value creation framework because he believes that it

will not only allow companies to gain and sustain a competitive advantage, but it will also reshape capitalism and its relationship to society.