Assessment 4
Corporate governance is: A) A technique to ensure that employees get paid a fair wage B) A system of controls, regulations and incentives designed to prevent fraud in an organization and to ensure that all the employees and office-bearers of the company work towards its goals C) A method by which shareholders ensure that managers are working to maximize share price D) A policy of the governance to ensure that no one company obtains excessive market power
B) A system of controls, regulations and incentives designed to prevent fraud in an organization and to ensure that all the employees and office-bearers of the company work towards its goals
How does the separation of ownership and management benefit managers? (select all that apply) A) Separation of ownership and management benefits managers because they can use their skills in the running of a business even if they do not have capital to invest in the firm B) Managers get no benefit, under this system; they produce the wealth, but somebody else gets it! C) Managers can do their job better without being bothered by shareholders. D) Managers can work at several firms and make the maximum use of their knowledge and skills
A only) Separation of ownership and management benefits managers because they can use their skills in the running of a business even if they do not have capital to invest in the firm
A proxy contest is: A) An effort by a group of dissident shareholders to gather shareholder proxies to win a vote against management B) A fight between two management figures that are supported by different shareholder groups C) A contest between bondholders and shareholders D) A contest between management and labor
A) An effort by a group of dissident shareholders to gather shareholder proxies to win a vote against management
Which of the following statements about managerial ownership of stock options and corporate governance is true? (select all that apply) A) Stock options are arguable better tool because they are more sensitive to changes in stock price; hence giving the manager a smaller number of dollars-worth of stock options have the same effect as a gift of a larger dollar-amount of shares B) Stock options can be too sensitive to changes in stock price; this could increase the incentive for the manager to engage in fraud simply to try and boost the stock price in the short term! C) Stock options increase in value when stock return volatility increases; hence ownership of stock options could incentive the manager to increase firm risk! D) There is no reason to prefer one method over another E) If the issue is solving the conflict of interests between managers and shareholders, managerial stock ownership is obviously better than ownership of stock options by managers. After all, shareholders are so called because they hold stock
A,B, and C A) Stock options are arguable better tool because they are more sensitive to changes in stock price; hence giving the manager a smaller number of dollars-worth of stock options have the same effect as a gift of a larger dollar-amount of shares B) Stock options can be too sensitive to changes in stock price; this could increase the incentive for the manager to engage in fraud simply to try and boost the stock price in the short term! C) Stock options increase in value when stock return volatility increases; hence ownership of stock options could incentive the manager to increase firm risk!
Which of the following statements regarding information provision by corporations is true? (select all that applies) A) Firms always find it in their own interest to provide all relevant information promptly to investors because otherwise they would lose investor trust B) Firms are quicker to provide good information, but slow to provide information, about the firm that reflects badly on firm worth C) Current laws make it difficult for corporations to provide information selectively to certain investors D) There is a legal duty for corporations to provide information that affects stock price to investors on a timely basis
A,B,C A) Firms always find it in their own interest to provide all relevant information promptly to investors because otherwise they would lose investor trust B) Firms are quicker to provide good information, but slow to provide information, about the firm that reflects badly on firm worth C) Current laws make it difficult for corporations to provide information selectively to certain investors
Insider trading occurs when managers and others with access to privileged information that others don't have use that information to trade. Which of the following statements about insider trading are true (select all that apply): A) Insider trading is useful because it provides an avenue to incorporate this private information into the stock price quicker, so that transactions prices would be closer to the true value of the shares B) Insider trading is harmful to investors because it allows insiders to buy undervalued securities from outsiders who have no idea they are selling their securities cheap. C) Insider trading harms investors because insiders would be able to sell securities that are overvalued given the information they have to outside investors at excessively higher prices D) Insider trading is always illegal in the US
A,B,C A) Insider trading is useful because it provides an avenue to incorporate this private information into the stock price quicker, so that transactions prices would be closer to the true value of the shares B) Insider trading is harmful to investors because it allows insiders to buy undervalued securities from outsiders who have no idea they are selling their securities cheap. C) Insider trading harms investors because insiders would be able to sell securities that are overvalued given the information they have to outside investors at excessively higher prices
What are some of the ways in which shareholders can affect company actions (select all that apply): A) Shareholders can introduce a slate of directors against the management-nominated slate and try to influence the outcome by soliciting shareholder proxies. B) They can submit a resolution at the shareholders' annual meeting C) Shareholders can bring a suit in court to force management to take specific actions D) Shareholders must approve major corporate actions, such as mergers; if they are not happy, shareholders can withhold such approval
A,B,D A) Shareholders can introduce a slate of directors against the management-nominated slate and try to influence the outcome by soliciting shareholder proxies. B) They can submit a resolution at the shareholders' annual meeting D) Shareholders must approve major corporate actions, such as mergers; if they are not happy, shareholders can withhold such approval
Which of the following statements about controlling shareholder groups reflect proper reasoning? (select all that apply) A) Firms with controlling shareholder groups could have a higher cost of equity because minority shareholders may worry about being dispossessed and require a higher return B) Firms with controlling shareholder groups are likely to have a higher cost of equity because such groups tend to be controlled by criminal interests C) Firms with controlling shareholder groups have a greater stake in controlling and monitoring managers and reducing inefficiency; hence their cost of equity could be smaller D) Firms with controlling shareholder groups are likely to have a lower cost of equity because investors prefer a strong management and are therefore willing to accept lower returns
A,C A) Firms with controlling shareholder groups could have a higher cost of equity because minority shareholders may worry about being dispossessed and require a higher return C) Firms with controlling shareholder groups have a greater stake in controlling and monitoring managers and reducing inefficiency; hence their cost of equity could be smaller
How would you respond to the following comment? Okay, so the separation of ownership and management creates a conflict of interests between shareholders and managers; shareholders cannot be certain that managers will act in their interests as residual claimants. But why is this a big problem? Managers are, at the end of the day, just a different kind of employee. Just monitor them, keep a watch on what they do and evaluate them on whether they do a good job or not! Problem solved! (select all that apply) A) Monitoring cannot be a complete solution to the problem of conflict of interests between managers and shareholders because monitoring is too costly. B) So who said there was a problem to begin with? C) If any one shareholder undertakes to monitor, s/he will have to incur the costs of monitoring, but s/he will also have to share the benefits of monitoring with all the other shareholders. As a result, s/he is unlikely to take on as much monitoring as would be otherwise optional D) It's never going to be possible for a second party to monitor and directly evaluate managers because nobody else would have the skills and the information to do so, without actually shadowing the manager on a daily basis! Which doesn't make any sense!
A,C,D A) Monitoring cannot be a complete solution to the problem of conflict of interests between managers and shareholders because monitoring is too costly. C) If any one shareholder undertakes to monitor, s/he will have to incur the costs of monitoring, but s/he will also have to share the benefits of monitoring with all the other shareholders. As a result, s/he is unlikely to take on as much monitoring as would be otherwise optional D) It's never going to be possible for a second party to monitor and directly evaluate managers because nobody else would have the skills and the information to do so, without actually shadowing the manager on a daily basis! Which doesn't make any sense!
Are there any advantages to separation of ownership and management in a corporation? (select all that applies) A) Shareholders, being freed of the need to participate in management, can diversify their investments across firms B) Managers can focus on long-term goals, which they couldn't if they were also investors and had to worry about potential losses C) There are no real advantages to this system; sole proprietorships better ensure that all actions in a firm are taken to maximize firm value. D) Managers can be chosen for their organizational ability, even if they do not have capital to invest
A,D A) Shareholders, being freed of the need to participate in management, can diversify their investments across firms D) Managers can be chosen for their organizational ability, even if they do not have capital to invest
Takeovers are important in corporate governance for these reasons: A) Often there is excessive emphasis on shareholder wealth; takeovers are important as a way to increase the welfare of other stakeholders B) Because shareholders are often fragmented, it's difficult for them to directly oppose management actions, even when they are value-reducing; takeovers allow for management changes in badly-run corporations C) Even if a manager has a good idea, it's not always possible for them to get their ideas implemented; takeovers allow the airing of competing ideas to increase share price D) Managers often feel stymied because they do not always have a way to obtain better jobs; takeovers allow management a way to be more upwardly mobile in their career path
B) Because shareholders are often fragmented, it's difficult for them to directly oppose management actions, even when they are value-reducing; takeovers allow for management changes in badly-run corporations
What is Sarbanes-Oxley? A) Sarbanes and Oxley were two senators, who were instrumental in he passing of the Jumpstart Our Business Startups Act, or JOBS Act in 2012. B) Sarbanes-Oxley is an act, passed in 2002, that mandates strict reforms to improve financial disclosures from corporations and prevent accounting fraud C) The Sarbanes-Oxley Act, otherwise known as the Wall Street Reform and Consumer Protection Act, is a United States federal law that was enacted in 2010 D) The Sarbanes-Oxley Act, passed in 1993, separated investment and commercial banking activities
B) Sarbanes-Oxley is an act, passed in 2002, that mandates strict reforms to improve financial disclosures from corporations and prevent accounting fraud
Tunneling is: A) The process by which management hides income from the tax authorities in order to reduce corporate income taxes B) The process by which individuals or groups of individuals with a controlling interest in several related firms move resources from firms here they have lower cashflow rights into firms where they have more cashflow rights C) The process by which individuals with a controlling interest in several related firms move resources from firms with more cash to firms with less cash D) The process by which a firm that is interested in acquiring another firm, tries to reduce the market value of that firm by providing false information to investors
B) The process by which individuals or groups of individuals with a controlling interest in several related firms move resources from firms here they have lower cashflow rights into firms where they have more cashflow rights
Some of the ways in which managers can entrench themselves to the detriment of shareholder interests are (select all that apply): A) The practice of using consultants to justify high salaries B) Poison pills, which makes it costlier for an acquirer to complete an acquisition C) Golden parachutes that pay managers a substantial amount in case of a takeover, if they are fired D) Super-majority amendments requiring more than a simple majority of votes for an acquisition
B,C,D B) Poison pills, which makes it costlier for an acquirer to complete an acquisition C) Golden parachutes that pay managers a substantial amount in case of a takeover, if they are fired D) Super-majority amendments requiring more than a simple majority of votes for an acquisition
Dual class share structures are corporate structures where only one class of shares may have voting rights, but all shares may share in dividends. Which of the following statements about dual class structures are true? (select all that are true) A) Voting and non-voting shares should trade at the same price because both types of shareholders share in dividends B) Dual class share listings are illegal in the United States C) Founders of companies often use dual class shares to maintain control of a company, while at the same time being able to access broader equity investments D) Dual class share structures add value to all shareholders because companies with such structures are able to better withstand hostile takeover attempts
C only C) Founders of companies often use dual class shares to maintain control of a company, while at the same time being able to access broader equity investments
What is a captured board? A) A board of directors that took a cruise and was seized by pirates of the Somali coast B) A board of directors that does not spend enough time on ensuring that the firm's managers do a good job C) A board of directors, comprised mostly directors who are beholden to the CEO D) A board of directors that has a productive relationship with the firm's CEO
C) A board of directors, comprised mostly directors who are beholden to the CEO
What is the value of stocks and stock options given to managers in terms of corporate governance? A) The granting to stocks and stock options to managers increases their wealth and makes them more willing to work harder B) Stock ownership does align the managers' incentives with those of shareholders. But stock option values are mainly driven by volatility and granting stock options to managers is irrelevant for the purpose of corporate governance C) Stock ownership makes a manager a part-owner of a firm and reduces the conflict of interests problem. Ownership of stock options too provides the managers with a way of aligning his/her wealth with stock performance. D) there is no value
C) Stock ownership makes a manager a part-owner of a firm and reduces the conflict of interests problem. Ownership of stock options too provides the managers with a way of aligning his/her wealth with stock performance.
What is the evidence regarding board size? A) The evidence suggests that larger boards are better because they are likely to have a variety of professional skills represented B) The size of the board is unrelated to the quality of decision-making C) The evidence suggests that small boards make better decisions D) Smaller boards are better because the expense is lower
C) The evidence suggests that small boards make better decisions
The conflict of interest between managers and shareholders in a corporation is because of: A) The fact that there are many shareholders, which means they cannot collaborate effectively B) the greed of managers C) the separation of ownership from management D) The struggle between two different classes of society
C) the separation of ownership from management