53) Accounting transparency
A) can only be achieved when managers commit to serving on their own audit committee.
B) occurs when the accounting department has translucent cubicles for their workers.
C) promises to reduce the information asymmetry between corporate insiders and the public.
D) none of the options
54) While debt can reduce agency costs between shareholders and management,
A) debt can create its own agency costs.
B) this only happens at extreme levels of debt.
C) this does not work for firms in mature industries with large cash reserves.
D) none of the options
55) 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) excessive debt may also induce the risk-averse managers to forgo profitable but risky
investment projects, causing an underinvestment problem. Additionally, with debt financing,
companies can misuse debt to finance corporate empire building.
D) none of the options
56) For firms with free cash flows,
A) debt can be a stronger mechanism than stocks for credibly bonding managers to release cash
flows to investors.
B) equity dividends can be a stronger mechanism than bonds for credibly bonding managers to
release cash flows to investors.
C) preferred stock dividends can be a stronger mechanism than bonds for credibly bonding
managers to release cash flows to investors.
D) none of the options
57) Debt can reduce agency costs between shareholders and management, but
A) only if the firm is totally up to its eyeballs in debt.
B) only to the extent that the firm can commit all of its free cash flow.
C) excessive debt can create its own agency conflicts.
D) debt is best used as a corporate governance mechanism by young companies with limited cash
reserves.
58) Companies domiciled in countries with weak investor protection can reduce agency costs
between shareholders and management
A) by moving to a better county.
B) by listing their stocks in countries with strong investor protection.
C) by voluntarily complying with the provisions of the U.S. Sarbanes-Oxley Act.
D) by having a press conference and promising to be nice to their investors.
59) Benetton, an Italian clothier, is listed on the New York Stock Exchange.
A) This decision provides their shareholders with a higher degree of protection than is available in
Italy.
B) This decision can be a signal of the company’s commitment to shareholder rights.
C) This may make investors both in Italy and abroad more willing to provide capital and to
increase the value of the pre-existing shares.
D) all of the options
60) 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.
61) In many countries, hostile takeovers are relatively rare. This is so partly because of
A) the language barrier.
B) concentrated ownership in these countries.
C) cultural values and political environments disapproving hostile corporate takeovers.
D) concentrated ownership in these countries, as well as cultural values and political environments
disapproving hostile corporate takeovers.
62) After a hostile takeover,
A) the existing management team is usually fired.
B) the existing management team is usually retained at a higher wage.
C) the target company usually mounts a takeover defense.
D) none of the options
63) In a hostile takeover attempt, the bidder typically
A) makes a tender offer to the target shareholders at a price substantially less than the prevailing
share price.
B) makes a tender offer to the target shareholders at the prevailing share price.
C) makes a tender offer to the target shareholders at a price substantially exceeding the prevailing
share price.
D) seeks to merge with the target company with an exchange of shares.
64) Suppose the managers of a company have driven the stock price down because they have spent
the investors’ money on lavish perquisites like golf club memberships.
A) This situation may prompt a corporate raider to buy up the shares of the firm in a hostile
takeover.
B) If the hostile takeover is successful, the managers will probably lose their jobs in the ensuing
restructuring.
C) If the restructuring is successful, the corporate raider can sell his shares at a profit.
D) all of the options
65) Private benefits of corporate control will tend to be higher in
A) French civil law countries than in English common law countries.
B) English common law countries than in French civil law countries.
C) French civil law countries than in Scandinavian civil law countries.
D) English common law countries than in German civil law countries.
66) 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 options
67) 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 options
68) Studies show that the quality of law enforcement, as measured by the rule of law index, will
tend to be
A) higher in French civil law countries than in English common law countries.
B) higher in English common law countries than in Scandinavian civil law countries.
C) highest in Scandinavian civil law countries and German civil law countries.
D) highest in English common law countries.
69) Suppose Mr. Lee and his relatives hold 30 percent of shares outstanding of Samsung Life,
which in turn holds 20 percent of Samsung Electronics. What is the cash flow right of the Lee
family in Samsung Electronics?
A) 50 percent
B) 10 percent
C) 20 percent
D) 6 percent
70) Concentrated corporate ownership is most prevalent in
A) Italy.
B) the U.K.
C) the U.S.
D) Australia.
71) In countries with concentrated ownership,
A) hostile takeovers are quite rare.
B) hostile takeovers are quite common.
72) 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.
D) none of the options
73) What is the difference between control rights and cash flow rights?
A) Since all shareholders benefit only from pro-rata cash flows, control rights and cash flow rights
are the same thing.
B) Large investors may be able to derive private benefits from control, thus control rights can
exceed cash flow rights.
C) Cash flow rights are more important than control rights since the only reason to invest in
anything is to generate cash.
D) none of the options
74) The key to extracting private benefits of control that are not shared by other shareholders on a
pro rata basis is to
A) become a large shareholder and acquire control rights exceeding cash flow rights.
B) buy a large block of nonvoting shares.
C) sell your shares in a tender offer.
D) force the firm into bankruptcy.
75) The voting premium, defined as the total vote value (value of a vote times the number of votes)
as a proportion of the firm’s equity market value is only about 2 percent in the United States and 36
percent in Mexico, suggesting that in Mexico,
A) dominant shareholders extract substantial private benefits of control.
B) dominant shareholders overpay and thus fail to extract substantial private benefits.
C) minority shareholders share in the private benefits of control.
D) none of the options
76) Unless investors can derive significant private benefits of control,
A) they will pay small premiums for voting shares over nonvoting shares.
B) they will pay moderate premiums for voting shares over nonvoting shares.
C) they will pay substantial premiums for voting shares over nonvoting shares.
D) they will not pay substantial premiums for voting shares over nonvoting shares.
77) The formula to compute the value of the “block premium” is
A)
B)
C)
D)
78) The value of private benefits of control may be measured using
A) the difference in value between non-voting shares and voting shares.
B) “block premium,” the difference between the price per share paid for a control block of shares
versus the exchange price of regular shares.
C) the difference in value between non-voting shares and voting shares or “block premium,” the
difference between the price per share paid for a control block of shares versus the exchange price
of regular shares.
D) none of the options
79) Several studies document the empirical link between
A) weak investor protection and GDP growth.
B) financial development and economic growth.
C) growth in GDP and concentrated ownership.
D) none of the options
80) Financial development can contribute to economic growth in what way(s)?
A) Financial development enhances savings.
B) Financial development channels savings toward real investments in productive capacities.
C) Financial development enhances the efficiency of investment allocation through the monitoring
and signaling functions of capital markets.
D) all of the options
81) Comparing the U.S. with the German and Japanese corporate governance systems,
A) the U.S. system is “market centered.”
B) the German and Japanese systems are “bank centered.”
C) it seems fair to say that no country has a perfect system.
D) all of the options.
82) The objective of corporate governance reform should be what?
A) Strengthen the protection of outside investors from expropriation by managers.
B) Strengthen the protection of outside investors from expropriation by controlling insiders.
C) Strengthen the protection of outside investors from expropriation by managers and controlling
insiders.
D) none of the options
83) 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 options
84) In the U.S., corporate governance reform has included all of the following except
A) strengthen the independence of boards of directors.
B) enhancing the transparency and disclosure of financial statements.
C) energizing the regulatory and monitoring functions of the SEC.
D) requiring auditors to sit on the boards of directors.
85) 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) both CEO and CFO sign off on the company’s financial statements.
D) all of the options
86) 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 options
87) 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) has increased the pace of foreign firms listing their shares in the U.S. and has also 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.
D) all of the options
88) The cost of compliance with the Sarbanes-Oxley Act
A) is a small amount, since most firms were playing by rules to begin with.
B) disproportionately affects small firms.
C) is paid for with tax credits for firms found to be in compliance.
D) all of the options
89) One implication of the Sarbanes-Oxley Act is that companies must appoint independent
“financial experts” to their committees. Which of the major components is associated with this
objective?
A) Accounting regulation
B) Audit committee
C) Internal control assessment
D) Executive responsibility
90) The major components of the Sarbanes-Oxley Act are
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) internal control assessment: Public companies and their auditors should assess the effectiveness
of internal control of financial record keeping and fraud prevention.
D) executive responsibility: Chief executive and finance officers (CEO and CFO) must sign off on
the company’s quarterly and annual financial statements. If fraud causes an overstatement of
earnings, these officers must return any bonuses.
E) all of the options
91) The key requirements of the Sarbanes-Oxley Act 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) none of the options.
92) Since the passage of the Sarbanes-Oxley Act,
A) some foreign firms have chosen 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.
D) none of the options
93) 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.
94) The Dodd-Frank Act was passed
A) in 1933.
B) in 2010.
C) in 1933 and repealed in 2010.
D) none of the options
95) 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 options
96) Following the adoption of the Cadbury Code of Best Practice joint CEO/COB positions
declined
A) from 27 percent of the companies before the adoption to 15 percent afterwards.
B) from 37 percent of the companies before the adoption to 15 percent afterwards.
C) from 47 percent of the companies before the adoption to 15 percent afterwards.
D) from 57 percent of the companies before the adoption to 15 percent afterwards.
97) Following the adoption of the Cadbury Code of Best Practice,
A) joint CEO/COB (chief executive officer and chairman of the board) positions declined.
B) there has been a significant impact on the internal governance mechanisms of U.K. companies.
C) CEOs have become more sensitive to company performance, strengthening managerial
accountability and weakening managerial entrenchment.
D) all of the options
98) Even though compliance with 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 options
99) 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) boards of directors should include at least three outside directors and the positions of CEO and
chairman of the board should not reside in the same individual.
100) The key requirements of the Cadbury Code of Best Practice state that
A) the compensation, nominating, and audit committees to be entirely composed of independent
directors.
B) the positions of CEO and chairman of the board should not reside in the same individual.
C) listed companies to have boards of directors with a majority of independents.
D) none of the options