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7) What are some of the negative efects of increasing the sensitivity of managerial pay to
irm performance?
AACSB Objective: Relective Thinking Skills
Author: JN
Question Status: Previous Edition
26.4 Managing Agency Conlict
1) Which of the following statements is FALSE?
A) The relationship between managerial ownership and irm value is unlikely to be the
same for every irm, or even for diferent executives of the same irm.
B) Even with the risk beneits 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 ire—thus reducing the incentive efect of the threat of
dismissal.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
11
2) Which of the following statements is FALSE?
A) If managers have large ownership stakes, then shareholders are more likely to use
compensation policies or a stronger board to create the desired incentives.
B) If all else fails, the shareholders' last line of defense against expropriation by self-
interested managers is direct action.
C) A shareholder resolution could direct the board to take a speciic action, such as
discontinue investing in a particular line of business or country, or remove a poison pill.
D) Any shareholder can submit a resolution that is put to a vote at the annual meeting.
AACSB Objective: Relective Thinking Skills
Author: JN
Question Status: Previous Edition
3) Which of the following statements is FALSE?
A) Recently, shareholders have started organizing "no" votes. That is, when they are
dissatisied with a board, they simply refuse to vote to approve the slate of nominees for
the board.
B) One early study of proxy contests found that the announcement of a contest increased
irm stock price by 8% on average, even if the challenge was eventually unsuccessful and
the incumbents won reelection.
C) Shareholders' only real role in governance is in electing the directors of the company.
D) Perhaps the most extreme form of direct action that disgruntled shareholders can take
is to hold a proxy contest and introduce a rival slate of directors for election to the board.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
12
4) Which of the following statements is FALSE?
A) One study found that irms with fewer restrictions on shareholder power performed
worse than irms 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 dissatisied 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 irm.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
5) Which of the following statements is FALSE?
A) An active takeover market is part of the system through which the threat of dismissal is
maintained.
B) When internal governance systems such as ownership, compensation, board oversight,
and shareholder activism fail, the one remaining way to remove poorly performing
managers is by mounting a hostile takeover.
C) Likely because hostile takeovers and internal governance systems are substitute
mechanisms, researchers have found that boards are less likely to ire managers for poor
performance during active takeover markets than they are during lulls in takeover activity.
D) The efectiveness of the corporate governance structure of a irm depends on how well
protected its managers are from removal in a hostile takeover.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
13
6) What is the role of takeovers in corporate governance?
AACSB Objective: Relective Thinking Skills
Author: JN
Question Status: Previous Edition
26.5 Regulation
1) Which of the following was not a inding of the Cadbury Commission?
A) Audit and compensation committees should be made up entirely of independent
directors or, at least, have a majority of them.
B) Auditors should be rotated, and there should be fuller disclosure of non-audit work.
C) The CEO should not be chairman of the board, and at the very least there should be a
lead independent director with similar agenda-setting powers.
D) The CEO and the CFO should personally attest to the accuracy of the inancial
statements presented to shareholders.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
2) The Sarbanes-Oxley Act requires all of the following EXCEPT ________.
A) audit partners rotate every ive years to limit the likelihood that auditing relationships
become too cozy over long periods of time
B) strict limits on the amount of non-audit fees (consulting or otherwise) that an accounting
irm can earn from the same irm that it audits
C) senior management and the boards of public companies to be comfortable enough with
the process through which funds are allocated and controlled, and outcomes monitored
throughout the irm, to be willing to attest to their efectiveness and validity
D) the auditor must personally attest to the accuracy of the inancial statements presented
to shareholders and to sign a statement to that efect
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
3) 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
________.
A) overhauling incentives and independence in the auditing process
14
B) mandating the separation of the positions of CEO and Chairman of the Board
C) stifening penalties for providing false information
D) forcing companies to validate their internal inancial control processes
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
4) Which of the following statements is FALSE?
A) The Cadbury Commission stifened 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 (SEC) and prohibited trading on private information gained as
an insider of a irm.
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 inancial health of a company.
D) While one study found that those irms that separated the position of CEO and chairman
performed better, another found no relation between the independence of key board
committees and irm performance in the post-Cadbury era.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
15
5) Which of the following statements regarding auditors is FALSE?
A) Most auditors have a longstanding relationship with their audit clients; this extended
relationship and the auditors' desire to keep the lucrative auditing fees makes auditors less
willing to challenge management.
B) Most accounting irms have developed large and extremely proitable consulting
divisions. Obviously, if an audit team refuses to accommodate a request by a client's
management, that client will be less likely to choose the accounting irm's consulting
division for its next consulting contract.
C) Auditing irms are supposed to ensure that a company's inancial statements accurately
relect the inancial state of the irm.
D) In the post Sarbanes-Oxley world, accounting irms are no longer allowed to ofer both
audit and non-audit services to the same irm.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
6) Which of the following statements regarding auditors is FALSE?
A) The Sarbanes-Oxley Act called on the SEC to force companies to have audit committees
that are dominated by outside directors and required that at least one outside director have
a inancial background.
B) Whether information is material has been deined in the courts as referring to whether
the information would have been a signiicant factor in an investor's decision about the
value of the security.
C) CEOs and CFOs must return bonuses or proits from the sale of stock or the exercise of
options during any period covered by statements that are later restated.
D) The law is especially strict with regard to takeover announcements, prohibiting any
insider with nonpublic information about a pending or ongoing tender ofer from trading on
that information or revealing it to someone who is likely to trade on it.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
16
