International Finance Chapter 21

1 Corporate governance can be defined as a) the economic, legal, and institutional framework in which corporate control and cash flow rights are distributed among shareholders, managers and other stakeholders of the company. b) the general framework in which company management is selected and monitored. c) the rules and regulations adopted by boards of directors specifying how to manage companies. d) the government-imposed rules and regulations affecting corporate management.

A

13 The separation of the company's ownership and control, a) is especially prevalent in such countries as the United States and the United Kingdom, where corporate ownership is highly diffused. b) is especially prevalent in such countries as the Italy and Mexico, where corporate ownership is highly concentrated. c) is a rational response to the agency problem. d) none of the above

A

2 Corporate governance structure a) varies a great deal across countries. b) has become homogenized following the integration of capital markets. c) has become homogenized due to cross-listing of shares of many public corporations. d) none of the above

A

20 In the U.S., the chief role of the board of directors is a) to hire the management team. b) to decide on the annual capital budget. c) to design an effective incentive compatible compensation scheme for themselves. d) none of the above

A

21 In the United Kingdom, the majority of public companies 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

25 Concentrated ownership of a public company a) can be an effective way to alleviate the agency problem between shareholders and managers. b) is the norm in Great Britain. c) tends to be an ineffective way to alleviate conflicts of interest between groups of shareholders. d) none of the above

A

34 The Sarbanes-Oxley Act of 2002 a) has had the consequence that many foreign firms have de-listed in the U.S. exchanges and listed their shares on the London Stock Exchange and other European exchanges. b) has increased the pace of foreign firms listing their shares in the U.S. c) a) and b) are both true d) all of the above

A

35 Since the passage of the Sarbanes-Oxley Act, a) some foreign firms choose to list their shares on the London Stock Exchange and other European exchanges, instead of U.S. exchanges, to avoid the costly compliance. b) the pace of foreign firms listing their shares in the U.S. has increased. c) the firms have passed this increased cost on to their customers.

A

14 In the United States, managers are legally bound by the "duty of loyalty" to a) the board of directors. b) to the shareholders. c) to the bondholders. d) to the government.

B

15 Outside the United States and the United Kingdom, a) concentrated ownership of the company is more the exception than the rule. b) diffused ownership of the company is more the exception than the rule. c) partnerships are more important than corporations. d) none of the above

B

17 The investors supply funds to the company but are not involved in the company's daily decision making. As a result, many public companies come to have a) strong shareholders and weak managers. b) strong managers and weak shareholders. c) strong managers and strong shareholders. d) weak managers and weak shareholders.

B

22 In Germany the corporate board is 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.

B

24 In the United States, it is not uncommon for the same person to serve as both CEO and chairman of the board. a) This situation must not have much conflict of interest since it is common. b) This situation has a built-in conflict of interest. c) This is only legal if that individual owns a controlling number of shares in the firm d) None of the above

B

27 In the United States and the United Kingdom, hostile takeovers a) are illegal. b) can serve as a drastic corporate governance mechanism of the last resort. c) reinforce the notion that managers can take their control of the company for granted. d) require management approval.

B

28 English common law countries tend to provide a stronger protection of shareholder rights than French civil law countries because a) the former countries tend to be more democratic than the latter. b) the former countries tend to protect property rights better than the latter. c) the former countries tend to have more separation of power than the latter. d) all of the above

B

31 One of the objectives of corporate governance reform is to, a) introduce expensive and burdensome accounting reforms. b) strengthen the protection of outside investors from expropriation by managers and controlling insiders. c) provide taxpayer financing for corporate raiders to strengthen the discipline of the marketplace. d) none of the above

B

33 The Sarbanes-Oxley Act of 2002 a) applies to all U.S. firms b) applies to listed companies c) applies to issuers whose securities are traded on an over-the-counter bulletin board. d) all of the above

B

37 The Cadbury Code of Best Practice a) is the U.N. equivalent of the Sarbanes-Oxley Act. b) is voluntary, but firms that fail to comply must explain why they choose not to comply. c) has the force of law, like the Sarbanes-Oxley Act. d) none of the above

B

6 In many countries with concentrated ownership a) the conflicts of interest between shareholders and managers are worse than in countries with diffuse ownership of firms. b) the conflicts of interest are greater between large controlling shareholders and small outside shareholders than between managers and shareholders. c) the conflicts of interest are greater between managers and shareholders than between large controlling shareholders and small outside shareholders. d) corporate forms of business organization with concentrated ownership are rare.

B

9 The central issue of corporate governance is a) how to protect creditors from managers and controlling shareholders. b) how to protect outside investors from the controlling insiders. c) how to alleviate the conflicts of interest between managers and shareholders. d) how to alleviate the conflicts of interest between shareholders and bondholders.

B

10 In theory, a) managers are hired by the shareholders at the annual stockholders meeting. If the managers turn in a bad year, new ones get hired. b) shareholders hire the managers to oversee the board of directors. c) managers are hired by the board of directors; the board is accountable to the shareholders. d) none of the above

C

18 The agency problem refers to the possible conflicts of interest between a) self-interested managers as principals and shareholders of the firm who are the agents. b) altruistic managers as agents and shareholders of the firm who are the principals. c) self-interested managers as agents and shareholders of the firm who are the principals. d) dutiful managers as principals and shareholders of the firm who are the agents.

C

26 While debt can reduce agency costs between shareholders and management, 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

C

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

C

3 In a public company with diffused ownership, the board of directors is entrusted with a) monitoring the auditors and safeguarding the interests of shareholders. b) monitoring the shareholders and safeguarding the interests of management. c) monitoring the management and safeguarding the interests of shareholders. d) none of the above

C

30 A pyramidal ownership structure is one in which 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

C

36 The major components of the Sarbanes-Oxley Act include all of the following except a) accounting regulation—The creation of a public accounting oversight board charged with overseeing the auditing of public companies, and restricting the consulting services that auditors can provide to clients. b) audit committee—the company should appoint independent "financial experts" to its audit committee. c) shareholder voting rights reform—"one share one vote" is now the law of the land. d) executive responsibility—CEOs and CFOs must sign off on the company's financial statements.

C

4 The key weakness of the public corporation is a) too many shareholders, which makes it difficult to make corporate decision. b) relatively high corporate income tax rates. c) conflicts of interest between managers and shareholders. d) conflicts of interests between shareholders and bondholders.

C

11 In the reality of corporate governance at the turn of this century, a) boards of directors are often dominated by management-friendly insiders. b) a typical board of directors often has relatively few outside directors who can independently and objectively monitor the management. c) managers of one firm often sit on the boards of other firms, whose managers are on the board of the first firm. Due to the interlocking nature of these boards, there can exist a culture of "I'll overlook your problems if you overlook mine." d) all of the above have been true to a greater or lesser extent in the recent past.

D

12 The public corporation has a key weakness: a) the conflicts of interest between bondholders and shareholders. b) the conflicts of interest between managers and bondholders. c) the conflicts of interest between stakeholders and shareholders. d) the conflicts of interest between managers and shareholders.

D

16 Why is it rational to make shareholders "weak" by giving control to the managers of the firm? a) This may be rational when shareholders may be neither qualified nor interested in making business decisions. b) This may be rational since many shareholders find it easier to sell their shares in an underperforming firm than to monitor the management. c) This may be rational to the extent that managers are answerable to the board of directors. d) All of the above are explanations for the separation of ownership and control.

D

19 Self-interested managers may be tempted to a) indulge in expensive perquisites at company expense. b) adopt antitakeover measures for their company to ensure their personal job security. c) waste company funds by undertaking unprofitable projects that benefit themselves but not shareholders. d) all of the above are potential abuses that self-interested managers may be tempted to visit upon shareholders.

D

23 In the United States a) boards of directors are legally responsible for representing the interests of the shareholders. b) due to the diffused ownership structure of the public company, management often gets to choose board members who are likely to be friendly to management. c) there is a correlation between underperforming firms and boards of directors who are not fully independent. d) all of the above are true, in the United States.

D

32 The Sarbanes-Oxley Act of 2002 stipulates that a) a public accounting oversight board be created. b) the company should appoint independent financial experts to its audit committee. c) CEO and CFO sign off the company's financial statements. d) all of the above

D

38 The Cadbury Code has not been legislated into law, and compliance with the code is voluntary. a) However, the London Stock Exchange (LSE) currently requires that each listed company show whether the company is in compliance with the code and explain why if it is not. b) This "comply or explain" approach has apparently persuaded many companies to comply rather than explain. c) Currently, 90 percent of all LSE-listed companies have adopted the Cadbury Code. d) All of the above

D

39 Even though the compliance the Cadbury Code of Best Practice is voluntary, a) the Cadbury Code has made a significant impact on the internal governance mechanisms of U.K. companies. b) the job security of U.K. chief executives has become more sensitive to the company performance, strengthening managerial accountability and weakening its entrenchment. c) joint CEO/COB (chief executive officer and chairman of the board) positions declined. d) all of the above

D

40 The key requirements of the Cadbury Code of Best Practice state that a) boards of directors should include at least three outside directors. b) the positions of CEO and chairman of the board should not reside in the same individual. c) compliance is mandatory for public corporations, optional for listed non-public corporations. d) both a) and b)

D

5 When company ownership is diffuse, a) a "free rider" problem discourages shareholder activism. b) the large number of shareholders ensures strong monitoring of managerial behavior because with a large enough group, there's almost always someone who will to incur the costs of monitoring management. c) few shareholders have a strong enough incentive to incur the costs of monitoring management. d) both a) and c) are correct

D

7 The public corporation a) is jointly owned by a (potentially) large number of shareholders. b) offers shareholders limited liability. c) separates the ownership and control of a firms assets. d) all of the above

D

8 The key strengths of the public corporation is/are a) their capacity to allow efficient risk sharing among many investors. b) their capacity to raise large amounts of funds at relatively low cost. c) their capacity to consolidate decision-making. d) all of the above

D