978-0133507676 Chapter 26 Part 2

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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

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

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

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

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

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