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END-OF-CHAPTER GUIDE
*Review Questions and Answers
*Critical Discussion Questions and Answers
*Global Action
*Closing Case
REVIEW QUESTIONS AND ANSWERS
1. What are the two primary means of financing? How do they differ?
The two primary means involve equity and debt. Equity (stock) represents ownership and
2. Why can tapping into a global pool of capital providers result in a lower cost of capital?
3. How would you characterize a corporation with diffused ownership?
Diffused ownership involves publicly traded corporations owned by numerous small
4. ON CULTURE: What are some of the pros and cons of family ownership?
Pros: Family ownership and control may provide better incentives for the firm to focus
Cons: Family ownership and control may lead to the selection of less qualified managers
5. Describe the differences between principal–agent conflicts and principal–principal
conflicts.
Managers are agents of the shareholders (the principals) and in a firm owned by many
shareholders, it may be difficult for any one or small number of shareholders to stop
6. Define the concept of expropriation of minority shareholders.
© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 143
Chapter 16: Financing and Governing The Corporation Globally
7. What do inside directors bring to a board of directors? What do outside directors have to
offer?
Inside directors are top executives of the firm and thus have a more detailed
8. What are the advantages and disadvantages of having two different individuals hold the
positions of board chair and CEO rather than combining these two positions?
9. Name and describe the two internal governance mechanisms typically employed by
boards.
The two internal governance mechanisms typically employed by boards can be
characterized as (1) “carrots” and (2) “sticks.” To better motivate managers, increasing
10. Briefly summarize the three external governance mechanisms.
There are three external governance mechanisms: (1) market for product competition, (2)
market for corporate control (This is the main external governance mechanism,
11. Under what conditions are the primary governance mechanisms likely to involve
concentration of ownership and control?
Common-law countries generally have the strongest legal protection of investors and the
lowest concentration of corporate ownership. Among common-law countries, such
12. Why do most SOEs suffer from weak external and internal governance mechanisms?
SOEs (of all nationalities) have both weak external and internal governance. Externally,
What are some of the formal institutions that affect corporate governance?
Better formal legal protection of shareholder rights, especially minority shareholders,
encourages founding families to dilute their equity and delegate day-today management
© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 144
Chapter 16: Financing and Governing The Corporation Globally
13. Explain how three aspects of recent globalization have influenced corporate governance.
First, thanks to more trade and investment, firms with different governance norms
increasingly come into contact, expose their differences and become aware of
14. Where does managerial human capital fit into a VRIO framework?
15. Explain stewardship theory, and compare it to agency theory.
Stewardship theory is a “pro-management” theory that suggests that most managers can
16. Given the arguments for converging versus diverging corporate governance around the
world, which do you think is more likely to occur and why?
17. Compare Peng Atlas Map 1.1 with Map 3.4. Countries that have low levels of
development often benefit from outsourcing due to their low wages. Assume that a firm’s
board of directors is truly independent and makes decisions based only on economic
considerations. Why would it not also outsource the top executive jobs? To the extent that
such a thing might be possible, how might it be done?
Many companies do not have their headquarters in only one location. Some aspect of the
headquarters may be located away from the main offices where the CEO is located.
See PengAtlas Map 3.4’s “Poorest Ten.” Other than low wages, why might a firm outsource its
activities to one of these countries?
There are many possible answers. A firm might find that other issues such as taxes,
© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 145
Chapter 16: Financing and Governing The Corporation Globally
CRITICAL DISCUSSION QUESTIONS AND ANSWERS
1. Some argue that the Anglo–American–style separation of ownership and control is an
inevitable outcome. Others contend that this is one variant (among several) of how large
firms can be effectively governed and that it is not necessarily the most efficient form.
What do you think?
This is a question in which the answer is not as important as the thought process and the
ability to clearly articulate. However, the extent of concentration of ownership may be a
2. Recent corporate governance reforms in various countries urge (and often require) firms
to add more outside directors to their boards and to separate the jobs of board chairman
and CEO. Yet, academic research has not been able to conclusively support the merits of
both practices. Why?
There are many variables that affect a firm’s success and it may be difficult to compare
3. ON ETHICS: As a chairman/CEO, you are choosing between two candidates for one
outside (independent) director position on your board. One is another CEO, a longtime
friend on whose board you have served for many years. The other is a known shareholder
activist whose tag line is “No need to make fat cats fatter.” Placing him on the board will
earn you kudos among analysts and journalists for inviting a leading critic to scrutinize
your work. But he may try to prove his theory that CEOs are overpaid—in other words,
your compensation can be on the line. Whom would you choose?
The activist may help provide a valuable alternative view on various issues but there is
ON ETHICS: Suppose you were CEO of a firm that lost US$50 million, but you were given a
bonus of US$10 million. You were vilified in the media and brought before a Congressional
committee that accused you of financial outrage. However, you pointed out that the most
optimistic forecast for your firm had been that it would lose over US$6 billion. There was no
significant change in markets, the economy, or anything else during the year other than the new
strategy that you implemented—a strategy that reduced losses by US$5,950,000,000 to only
US$50,000,000, and thus you felt that you were actually underpaid. But the politicians felt that it
still looked bad and that if you had been socially responsible, you would have refused the bonus.
How do you respond?
© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 146
Chapter 16: Financing and Governing The Corporation Globally
GLOBAL ACTION
1. Your privately owned company consistently balances the interests of business
freedom and labor freedom in its operations. As such, it has become an example
for other firms worldwide to emulate. Since the tension between wages
and prices at both the labor and business level must be constantly reevaluated
and improved, evaluate the leading countries that your firm can use as a
model for continued commitment to the freedoms of business as well as labor.
Exercise 1 Answers
One resource which can be used is “Heritage Foundation: Index of Economic Freedom
Country Rankings”. This website can be found by entering the search term “economic
2. As CEO of a large multinational firm, the financial globalization level of a
country can present different problems and solutions for success. Using a
well-known index of financial globalization, evaluate and discuss specific
countries in which the concerns of a high and low level of globalization must
be addressed.
Exercise 2 Answers
One resource which can be used is “KOF Index of Globalization”. This website can be
found by entering the search term “index of globalization” at the globalEDGE™
CLOSING CASE DISCUSSION GUIDE AND ANSWERS
What Makes Analysts Say Buy?
1. Why do analysts in the US and Europe pay more attention to corporate governance?
© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 147
Chapter 16: Financing and Governing The Corporation Globally
2. How do analysts in different regions rate the importance of the quality of top
management? Why are there such differences?
A new buy recommendation for large firms that analysts viewed as having high-quality
3. If you were CEO of a listed company in Asia, what are the top three areas that you would
focus on in order to attract analysts to make a buy recommendation?
© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 148
