Business Policy Chapter 10

Which of the following hostile takeover defense strategies has a positive effect on shareholder wealth? a. Greenmail b. Standstill agreement c. Litigation d. Corporate charter amendment

c. Litigation

Gilbreth Electronics is being targeted for a takeover by CSC Technologies. As a defense tactic, managers at Gilbreth have drawn up a contract specifying that CSC will not purchase additional shares of Gilbreth for a specified period of time in exchange for a fee paid by Gilbreth. Which of the following defense strategies is Gilbreth's managers employing? a. A standstill agreement b. A golden parachute c. Greenmail d. A poison pill

a. A standstill agreement

Which of the following is NOT an agency problem that often exists in modern corporations? a. CEOs who feel constrained by governance mechanisms are less likely to seek external advice. b. The principal and the agent have different interests and goals. c. Shareholders lack direct control of large publicly traded corporations. d. An agent makes decisions that results in pursuing goals that conflict with those of the principals.

a. CEOs who feel constrained by governance mechanisms are less likely to seek external advice.

Which of the following best explains why German executives aren't dedicated to the maximization of shareholder wealth to the degree that their counterparts are in the United Kingdom and the United States? a. Private shareholders rarely have major ownership positions in German firms. b. Large institutional investors control large blocks of corporate stock in German firms. c. German boards of directors are more simply structured and less involved in monitoring and controlling managerial decisions and actions. d. The roles of CEO and chair of the board of directors are usually combined in German firms, allowing for widespread wrongdoing and rash decisions.

a. Private shareholders rarely have major ownership positions in German firms.

Which classification of board member is defined as having some relationship with the firm, contractual or otherwise, that may create questions about their independence, but are not involved with the corporation's day-to-day activities? a.Related outsiders b. Insiders c. Unrelated outsiders d. Outsiders

a. Related outsiders

Which of the following statements regarding the Sarbanes-Oxley Act (SOX) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) is NOT true? a. SOX is intended to align financial institutions' actions with society's interests. b. Dodd-Frank is the most sweeping set of financial regulatory reforms in the United States since the Great Depression. c. Dodd-Frank includes provisions related to the categories of consumer protection, systemic risk oversight, executive compensation, and capital requirements for banks. d. While the implementation of SOX has been controversial to some, most believe that it has led to generally positive results in terms of protecting stakeholders and shareholders' interests.

a. SOX is intended to align financial institutions' actions with society's interests.

Which of the following two parties are the focus of corporate governance? a. Shareholders and managers b. Managers and the board of directors c. The board of directors and shareholders d. The president of the corporation and the chairman of the board of directors

a. Shareholders and managers

Christina's contract with Nationwide Mutual Insurance Company is an example of: a. an agency relationship. b. managerial opportunism. c. corporate governance. d. a strategic alliance.

a. an agency relationship

The Dodd-Frank Act includes provisions related to all of the following categories EXCEPT: a. bankruptcy laws. b. capital requirements for banks. c. executive compensation. d. systemic risk oversight.

a. bankruptcy laws

In contrast to managers, shareholders may prefer that free cash flow be: a. distributed to them as dividends. b. used to reduce debt of the firm. c. reinvested in lucrative corporate assets. d. used for purposes of further diversifying the firm.

a. distributed to them as dividends

To manage her investment risk as a shareholder, Jennifer should maintain a(n) _____ portfolio by investing in several companies to _____ her overall risk. a. diversified; reduce b. large; increase c. undervalued; reduce d. international; increase

a. diversified; reduce

With _____ degrees of ownership concentration, the probability is _____ that managers' decisions will be designed to maximize shareholder value. a. high; greater b. average; lower c. low; greater d. high; lower

a. high; greater

A _____ is an acquisition of a target company by an acquiring firm that is accomplished not by coming to an agreement with the target company's management but by going directly to the company's shareholders or fighting to replace management in order to get the acquisition approved. a. hostile takeover b. golden parachute c. capital structure change d. poison pill

a. hostile takeover

Agency costs do NOT include _____ costs. a. opportunity b. incentive c. monitoring d. enforcement

a. opportunity

Some research suggests that a firm performs better if: a. outside directors own significant equity stakes in the firm. b. the board of directors includes employees as voting members. c. the board of directors is relatively homogenous in its makeup. d. the CEO also holds the chair of the board title.

a. outside directors own significant equity stakes in the firm.

In general, ownership concentration's influence on strategies is _____, and ownership concentration's influence on firm performance is _____. a. positive; positive b. positive; negative c. negative; positive d. negative; negative

a. positive; positive

Principals establish governance and control mechanisms to: a. prevent agents from acting opportunistically. b. force agents to seek external advice. c. ensure decisions are thoroughly researched before being implemented. d. ensure the proper documentation of all decisions.

a. prevent agents from acting opportunistically.

Activist pension funds are _____ in nature, while activist hedge funds are _____. a. reactive; proactive b. assets; equity c. similar; dissimilar d. increasing; decreasing

a. reactive; proactive

Managerial employment risk is _____ with increased diversification because a firm and its upper-level managers are less vulnerable to the _____ in demand associated with a single or limited number of product lines or businesses. a. reduced; reduction b. increased; increase c. increased; reduction d. reduced; increase

a. reduced; reduction

The separation of ownership and managerial control allows shareholders to purchase stock, but the right to purchase stock and the potential to receive income from the firm's operations requires them to take a risk. This risk is that they will receive income only if the firm's _____ exceed(s) its _____. a. revenues; expenses b. assets, liabilities c. liabilities; equities d. net income; free cash flow

a. revenues; expenses

China's economy exhibits traits of both _____ and _____. a. socialism; market orientation b. communism; market orientation c. consensus; competition d. centralization; decentralization

a. socialism; market orientation

What is the Japanese "keiretsu"? a. The banks owning the largest shares of stock in the firm b. A group of firms tied together by cross-shareholdings c. Company unions, which are a type of governance system d. Management structures related to total quality management (TQM) systems

b. A group of firms tied together by cross-shareholdings

Which of the following is NOT a consequence of the Sarbanes-Oxley Act (SOX)? a. A decreased number of foreign firm listings resulted on U.S. stock exchanges. b. An increased number of IPOs (initial public offerings) were legislated. c. Internal auditing scrutiny in firms' financial reporting improved. d. Section 404 increased costs for firms.

b. An increased number of IPOs (initial public offerings) were legislated.

Historically, which type of firm occupied the center of the German corporate governance system? a. Utilities b. Banks c. Mining firms d. Manufacturing firms

b. Banks

Which of the following statements about diffuse ownership is true? a. As ownership of the corporation is diffused, shareholders' ability to monitor managerial decisions strengthens. b. Diffuse ownership makes it difficult for owners to effectively coordinate their actions. c. Diffuse ownership often results in increased shareholder value. d. Diffuse ownership occurs when an individual holds both the CEO and chair of the board titles.

b. Diffuse ownership makes it difficult for owners to effectively coordinate their actions.

_____ are financial institutions, such as mutual funds and pension funds, that control large-block shareholder positions. a. Outsiders b. Institutional owners c. Insiders d. Boards of directors

b. Institutional owners

Which of the following is a benefit that product diversification can create for top-level managers that shareholders do not enjoy? a. It increases top-level managers' employment risk. b. It provides an opportunity for top-level managers to increase their compensation. c. It allows top-level managers the opportunity to make strategic decisions that maximize their personal welfare. d. It decreases the complexity of managing a firm.

b. It provides an opportunity for top-level managers to increase their compensation.

Which of the following is a means considered to improve the effectiveness of outside directors? a. Requiring that outside directors act objectively, having no ownership interest in the firm b. Requiring outside directors to own significant equity stakes in the firm as a prerequisite to holding a board seat c. Mandating that all outside directors come from government or academia rather than industry as a prerequisite for holding a board seat d. Requiring that outside directors be former executives of the firm as a prerequisite to holding a board seat

b. Requiring outside directors to own significant equity stakes in the firm as a prerequisite to holding a board seat

Markham Food Services contracts with elementary schools in three states to supply meals for children. In order to increase profits, Markham uses substandard ingredients in these meals but has passed its quality investigations with the various school districts. Who is ultimately responsible for the corporate climate that resulted in this wrongdoing? a. The head of contract services for the school districts b. Employees directly involved in the wrongdoing c. Markham's board of directors d. The director of food services for Markham

c. Markham's board of directors

Which of the following statements about ownership concentration is NOT true? a. Ownership of many modern corporations is now concentrated in the hands of institutional investors rather than individual stockholders. b. Research evidence suggests that ownership concentration is associated with higher levels of firm product diversification. c. Ownership concentration as a governance mechanism has received considerable interest, because large-block shareholders are increasingly active in their demands that firms adapt effective governance mechanisms to control managerial decisions so that they will best represent owners' interests. d. Research indicates that institutional activism may not have a strong direct effect on firm performance, but it may indirectly influence a targeted firm's strategic decisions (including those concerned with social issues).

b. Research evidence suggests that ownership concentration is associated with higher levels of firm product diversification.

_____ firms are the most harmed by bribery. a. Large multinational b. Small- and medium-sized c. Small- and large-sized d. Medium- and large-sized

b. Small- and medium-sized

Who are typically assumed to be responsible for an undervalued firm's poor performance? a. The board of directors b. Top-level managers c. Institutional owners d. Shareholders

b. Top-level managers

Which of the following is a reason why it can be difficult for boards of directors to effectively assess top-level managers' decisions on a regular basis? a. Boards do not have access to information other than financial documentation. b. Typically, the effects of top-level managers' decisions are stronger on the firm's long-term performance than its short-term performance. c. Typically, boards only meet every other year. d. insider board members are reluctant to disclose issues resulting from poor decisions to all board members.

b. Typically, the effects of top-level managers' decisions are stronger on the firm's long-term performance than its short-term performance.

Research results suggest that stock option incentives: a. are linked to poor managerial decision making and lower performance. b. can be associated with top-level managers' fraudulent behavior, such as earnings manipulation. c. are more motivating to top-level managers than salaries and bonuses. d. are a more important part of compensation packages for top-level managers pursuing an international strategy than for top-level managers leading U.S. firms.

b. can be associated with top-level managers' fraudulent behavior, such as earnings manipulation.

A _____ is a lump-sum payment of cash that is given to one or more top-level managers when the firm is acquired in a takeover bid. a. hostile takeover b. golden parachute c. standstill agreement d. poison pill

b. golden parachute

Businesswoman Marybeth Johnson just purchased an additional 2,000 shares of Western Telecomm, which means she now possesses about 7 percent of the firm's issued shares. This makes her a(n): a. angel investor. b. large-block shareholder. c. insider. d. institutional owner.

b. large-block shareholder

Corporate governance does NOT include: a .ensuring that top-level managers' interests are aligned with the interests of stakeholders. b. resolving conflicts among corporate employees. c. establishing and maintaining harmony between the firm's owners and its top-level managers whose interests may conflict. d. using mechanisms to determine and control the strategic direction and performance of organizations.

b. resolving conflicts among corporate employees.

Commonly, those managing small firms own a _____ percentage of the firm, which means there is _____ separation between ownership and managerial control. a. significant; more b. significant; less c. small; more d. small; less

b. significant; less

Corporate governance is the set of mechanisms used to manage the relationships among stakeholders and to determine and control the _____ of organizations. a. selection of products and markets b. strategic direction and performance c. revenues, expenses, and profit margins d. opportunities and threats

b. strategic direction and performance

All of the following are internal governance mechanisms used in the modern corporation EXCEPT: a. executive compensation. b. the market for corporate control. c. the board of directors. d. ownership concentration.

b. the market for corporate control

A rule approved by the U.S. Securities and Exchange Commission (SEC) allows large shareholders (owning 1 to 5 percent of a company's stock) to nominate up to _____ percent of a company's board of directors. a. 5 b. 10 c. 25 d. 50

c. 25

Where does the principal source of financial advice and monitoring of large public firms come from in Japan? a. Stock brokerage companies b. The government c. Banks d. The boards of directors

c. Banks

Which of the following statements about the effectiveness of boards of directors is NOT true? a. Research suggests that diverse boards help firms make more effective strategic decisions and perform better over time. b. One of the changes to enhance the effectiveness of the board of directors is the creation of a "lead director" role that has strong powers with regard to the board agenda and oversight of non-management board member activities. c. Evidence suggests that boards have been highly effective in monitoring and controlling top-level managers' decisions and subsequent actions. d. The performances of individual board members and entire boards are being evaluated more formally and with greater intensity than in years past.

c. Evidence suggests that boards have been highly effective in monitoring and controlling top-level managers' decisions and subsequent actions.

Which of the following hostile takeover defense strategies involves the repurchase of the target firm's shares of stock that were obtained by the acquiring firm at a premium in exchange for an agreement that the acquirer will no longer target the company for takeover? a. Capital structure change b. Golden parachute c. Greenmail d. Poison pill

c. Golden parachute

Which of the following statements about the preferences of shareholders and top-level managers with regard to a firm's level of diversification is true? a. In general, shareholders prefer less focused diversification. b. Top-level managers prefer lower levels of product diversification than do shareholders. c. Shareholders seek a level of diversification that reduces the risk of the firm's total failure while simultaneously increasing its value. d. Top-level managers prefer that a firm's diversification increases their employment risk and employment opportunities.

c. Shareholders seek a level of diversification that reduces the risk of the firm's total failure while simultaneously increasing its value.

What is the governance mechanism most closely connected with deterring unethical behaviors by holding top-level managers fully accountable for developing and supporting an organizational culture in which only ethical behaviors are permitted? a. Executive compensation systems b. The market for corporate control c. The board of directors d. Ownership concentration

c. The board of directors

Which of the following statements about corporate governance in Germany is NOT true? a. Agency problems are not as prevalent in many private German firms. b. Employees, union members, and shareholders appoint members to the Aufsichtsrat (the supervisory tier of the board). c. The management board (Vorstand) is elected by the firm's employees. d. The Vorstand of a German corporation makes decisions about strategy and management.

c. The management board (Vorstand) is elected by the firm's employees.

Which of the following is an external governance mechanism that is active when a firm's internal governance mechanisms fail? a. A corporate charter b. Executive compensation c. The market for corporate control d. Capital structure

c. The market for corporate control

Which of the following is NOT one of the groups that board of directors' members are generally classified into? a. Related outsiders b. Insiders c. Unrelated outsiders d. Outsiders

c. Unrelated outsiders

Which of the following statements regarding the use of defense tactics by the target firm during a hostile takeover is NOT true? a. Defense tactics vary in their effectiveness as a defense to takeovers. b. In general, managers' use of defense tactics is considered to be self-serving in nature. c. Using takeover defenses increases the amount of pressure managers feel to seek short-term performance gains. d. Defense tactics can have both positive and negative effects on shareholder wealth.

c. Using takeover defenses increases the amount of pressure managers feel to seek short-term performance gains.

The separation between owners and managers creates a(n) _____ relationship. a. control b. dependent c. agency d. governance

c. agency

In recent years, the number of individuals who are large-block shareholders has: a. slightly increased. b. remained steady. c. declined. d. skyrocketed.

c. declined

Thompson Manufacturing is looking to enhance the effectiveness of its board of directors. All of the following are ways this can be done EXCEPT: a. increasing the diversity of the backgrounds of board members. b. strengthening internal management and accounting control systems. c. increasing stock options as part of board members' compensation. d. establishing and consistently using formal processes to evaluate board members' performance.

c. increasing stock options as part of board members' compensation.

Effectively using executive compensation as a governance mechanism is particularly challenging for firms implementing _____ strategies. a. corporate-level b. merger and acquisition c. international d. business-level

c. international

Ownership concentration is defined by the number of _____ and the _____. a. outside directors; total percentage of the firm's shares they own b. outside directors; parties they represent c. large-block shareholders; total percentage of the firm's shares they own d. large-block shareholders; parties they represent

c. large-block shareholders; total percentage of the firm's shares they own

Research suggests that firms in which families own enough equity to have influence without major control tend to: a. earn below-average returns. b. earn profits approximately equal to their competitors. c. make the best strategic decisions. d. have the most conflict between top-level managers and board members.

c. make the best strategic decisions

The Dodd-Frank Wall Street Reform and Consumer Protection Act does all of the following EXCEPT: a. provides a new framework to regulate derivatives. b. establishes new corporate governance requirements. c. prescribes significant transparency improvement on internal control associated with accounting and auditing. d. regulates credit rating agencies and securitizations.

c. prescribes significant transparency improvement on internal control associated with accounting and auditing.

In general, family-controlled businesses will outperform nonfamily-controlled businesses because they: a. have fewer large-block shareholders. b. are more risk averse. c. want to maintain the family legacy. d. have more insiders on their boards of directors.

c. want to maintain the family legacy

Which of the following statements regarding corporate governance is NOT true? a. Recent global emphasis on corporate governance stems mainly from the apparent failure of corporate governance mechanisms to adequately monitor and control top-level managers' decisions. b. Corporate governance involves oversight in areas where owners, managers, and members of boards of directors may have conflicts of interest. c. In modern corporations, a primary objective of corporate governance is to ensure that the interests of top-level managers are aligned with the interests of shareholders. d. At its core, corporate governance is concerned with making sure a firm and its shareholders behave in an ethical manner.

d. At its core, corporate governance is concerned with making sure a firm and its shareholders behave in an ethical manner.

When virtually exclusive reliance is placed on financial controls because the board of directors is outsider-dominated, which of the following is NOT a likely result of top-level managers' actions to reach the financial goals set by the board? a. Increased diversification in the firm b. Higher levels of compensation c. Reduced investments in research and development (R&D) d. Better strategic decision making

d. Better strategic decision making

Employee stock option plans (ESOPs), recapitalization, issuance of additional debt, and share buybacks are actions associated with which of the following hostile takeover defense strategies? a. Standstill agreement b. Golden parachute c. Greenmail d. Capital structure change

d. Capital structure change

Which of the following concepts is an important influence in Japanese corporate governance? a. Individualism b. Competition c. Innovation d. Consensus

d. Consensus

_____ is where a large number of shareholders with small holdings and few, if any, large-block shareholders exist, producing weak monitoring of managers' decisions. a. Institutional ownership b. Excessive appropriation c. Ownership concentration d. Diffuse ownership

d. Diffuse ownership

_____ is a governance mechanism that seeks to align the interests of managers and owners through salaries, bonuses, and long-term incentives such as stock awards and options. a. Managerial opportunism b. Management specialization c. Ownership concentration d. Executive compensation

d. Executive compensation

_____ typically own at least 5 percent of a company's issued shares. a. Related outsiders b. Angel investors c. Insiders d. Large-block shareholders

d. Large-block shareholders

Which of the following statements about incentives is NOT true? a. Annual bonuses may provide incentives to pursue short-run objectives at the expense of the firm's long-term interests. b. Long-term incentives tie a manager's overall wealth to the firm in a way that is inflexible. c. Long-term, performance-based incentives may reduce the temptation to underinvest in the short run. d. Long-term incentives decrease executive exposure to risks associated with uncontrollable events.

d. Long-term incentives decrease executive exposure to risks associated with uncontrollable events.

_____ includes the threat of job loss, loss of compensation, and loss of managerial reputation. a. Corporate governance b. Agency relationship c. Managerial opportunism d. Managerial employment risk

d. Managerial employment risk

_____ is an example of self-serving and opportunistic managerial behavior. a. Maximizing shareholder wealth b. Related-constraint diversification c. Shareholder optimal diversification d. Overdiversification

d. Overdiversification

A.D. Industries has been aggressively buying up stock in B.C. Enterprises, and the firm now possesses close to 20 percent of B.C.'s shares. The other B.C. shareholders are concerned that A.D. is getting ready for a hostile takeover, which will result in the termination of B.C.'s CEO and other executives. Which of the following managerial defense strategies would allow B.C.'s shareholders to block A.D. by diluting its existing stake in B.C.? a. Standstill agreement b. Litigation c. Corporate charter amendment d. Poison pill

d. Poison pill

Company XYZ is being targeted for a hostile takeover by Company ABC. Which of the following defense strategies that Company XYZ could employ would likely be the most successful? a. Corporate charter amendment b. Capital structure change c. Golden parachute d. Poison pill

d. Poison pill

Which of the following statements regarding the market for corporate control is true? a. Activist pension funds identify firms whose performance could be improved and then invest in them. b. For top-level managers, board acceptance of the acquiring firm's offer usually leads to job loss because the acquiring firm wants new leadership; if the offer is refused, however, the job loss risk is minimal. c. Research shows that most institutional investors support the use of hostile takeover defense strategies. d. Research suggests that the market for corporate control is an imperfect governance mechanism due to the fact that investors sometimes use the market for corporate control to take an ownership position in firms that are performing well.

d. Research suggests that the market for corporate control is an imperfect governance mechanism due to the fact that investors sometimes use the market for corporate control to take an ownership position in firms that are performing well.

Which of the following is NOT a factor that affects shareholders' preferences for a diversified position? a. The intensity of rivalry among competitors in the firm's primary industry b. The firm's perceived expertise in the new business and its effects on other firm strategies c. The top management team's experience with implementing diversification strategies d. The magnitude of executive compensation as compared to mid-level management compensation

d. The magnitude of executive compensation as compared to mid-level management compensation

Which of the following statements about corporate governance in China is NOT true? a. The state still relies on direct and/or indirect controls to influence the strategies employed by most firms. b. Corporate governance in China may be tilting toward the Western model. c. Firms with higher state ownership tend to have lower market value and more volatility across time. d. There has been a gradual increase in the equity held in state-owned enterprises while the number and percentage of private firms has declined.

d. There has been a gradual increase in the equity held in state-owned enterprises while the number and percentage of private firms has declined.

In the majority of cases, _____ are the principal means by which the market for corporate control is activated. a. capital structure changes b. poison pills c. standstill agreements d. hostile takeovers

d. hostile takeovers

A widely accepted view is that a board of directors with a significant percentage of _____ provides relatively _____ monitoring and control of managerial decisions. a. outsiders; weak b. related outsiders; strong c. related outsiders; weak d. insiders; weak

d. insiders; weak