International Finance Chapter 4

4
Student: ___________________________________________________________________________
1.
Countries with strong shareholder protection tend to have more valuable stock markets and more
companies listed on stock exchanges per capita than countries with weak protection.
True False
2.
Corporate governance can be defined as

Athe economic, legal, and institutional framework in which corporate control and cash flow rights are
. distributed among shareholders, managers and other stakeholders of the company.
B. the general framework in which company management is selected and monitored.
C. the rules and regulations adopted by boards of directors specifying how to manage companies.
D. the government-imposed rules and regulations affecting corporate management.
3.
When managerial self-dealings are excessive and left unchecked,

A. they can have serious negative effects on share values.
B. they can impede the proper functions of capital markets.
C. they can impede such measures as GDP growth.
D. all of the above
4.
Corporate governance structure

A. varies a great deal across countries.
B. has become homogenized following the integration of capital markets.
C. has become homogenized due to cross-listing of shares of many public corporations.
D. none of the above
5.
The genius of public corporations stems from their capacity to allow efficient sharing or spreading of risk
among many investors, who can buy and sell their ownership shares on liquid stock exchanges and let
professional managers run the company on behalf of shareholders. This risk sharing stems from
A. the liquidity of the shares.
B. the limited liability of shareholders.
C. the limited liability of bondholders.
D. the limited ability of shareholders.
6.
In a public company with diffused ownership, the board of directors is entrusted with
A. monitoring the auditors and safeguarding the interests of shareholders.
B. monitoring the shareholders and safeguarding the interests of management.
C. monitoring the management and safeguarding the interests of shareholders.
7.
The key weakness of the public corporation is

A. too many shareholders, which makes it difficult to make corporate decision.
B. relatively high corporate income tax rates.
C. conflicts of interest between managers and shareholders.
D. conflicts of interests between shareholders and bondholders.
8.
When company ownership is diffuse,

A. a "free rider" problem discourages shareholder activism.
Bthe large number of shareholders ensures strong monitoring of managerial behavior because with a large
. enough group, there's almost always someone who will to incur the costs of monitoring management.
C. few shareholders have a strong enough incentive to incur the costs of monitoring management.
D. both a and c are correct
9.
In many countries with concentrated ownership

A. the conflicts of interest between shareholders and managers are worse than in countries with diffuse
ownership of firms.
B the conflicts of interest are greater between large controlling shareholders and small outside
. shareholders than between managers and shareholders.
C the conflicts of interest are greater between managers and shareholders than between large controlling
. shareholders and small outside shareholders.
D. corporate forms of business organization with concentrated ownership are rare.
10. In what country do the three largest shareholders control, on average, about 60 percent of the shares of a
public company?
A. United States
B. Canada
C. Great Britain
D. Italy
11. The public corporation
A. is jointly owned by a (potentially) large number of shareholders.
B. offers shareholders limited liability.
C. separates the ownership and control of a firms assets.
D. all of the above
12. The key strengths of the public corporation is/are
A. their capacity to allow efficient risk sharing among many investors.
B. their capacity to raise large amounts of funds at relatively low cost.
C. their capacity to consolidate decision-making.
D. all of the above
13. The central issue of corporate governance is
A. how to protect creditors from managers and controlling shareholders.
B. how to protect outside investors from the controlling insiders.
C. how to alleviate the conflicts of interest between managers and shareholders.
D. how to alleviate the conflicts of interest between shareholders and bondholders.
14. In theory,
A.managers are hired by the shareholders at the annual stockholders meeting. If the managers turn in a
bad year, new ones get hired.
B. shareholders hire the managers to oversee the board of directors.
C. managers are hired by the board of directors; the board is accountable to the shareholders.
15. In the reality of corporate governance at the turn of this century,
A. boards of directors are often dominated by management-friendly insiders.
B a typical board of directors often has relatively few outside directors who can independently and
. objectively monitor the management.
Cmanagers of one firm often sit on the boards of other firms, whose managers are on the board of the
. first firm. Due to the interlocking nature of these boards, there can exist a culture of "I'll overlook your
problems if you overlook mine."
D. all of the above have been true to a greater or lesser extent in the recent past.
16. The strongest protection for investors is provided by
A. English common law countries, such as Canada, the United States, and the U.K.
B. French civil law countries, such as Belgium, Italy, and Mexico.
C. a weak board of directors.
D. socialized firms.
17. The public corporation has a key weakness:

A. the conflicts of interest between bondholders and shareholders.
B. the conflicts of interest between managers and bondholders.
C. the conflicts of interest between stakeholders and shareholders.
D. the conflicts of interest between managers and shareholders.
18. The separation of the company's ownership and control,
A is especially prevalent in such countries as the United States and the United Kingdom, where corporate
. ownership is highly diffused.
B. is especially prevalent in such countries as the Italy and Mexico, where corporate ownership is highly
concentrated.
C. is a rational response to the agency problem.
19. In the United States, managers are legally bound by the "duty of loyalty" to
A. the board of directors.
B. the shareholders.
C. the bondholders.
D. the government.
20. In the United States, managers are bound by the "duty of loyalty" to serve the shareholders.
A. This is an ethical, not legal, obligation.
B. This is a legal obligation.
C. This is only a moral obligation; there are no penalties.
21. Outside the United States and the United Kingdom,
A. concentrated ownership of the company is more the exception than the rule.
B. diffused ownership of the company is more the exception than the rule.
C. partnerships are more important than corporations.
22. A complete contract between shareholders and managers
A. would specify exactly what the manager will do under each of all possible future contingencies.
B. would be an expensive contract to write and a very expensive contract to monitor.
C. would eliminate any conflicts of interest (and managerial discretion).
D. all of the above
23. Why is it rational to make shareholders "weak" by giving control to the managers of the firm?
A. This may be rational when shareholders may be neither qualified nor interested in making business
decisions.
B This may be rational since many shareholders find it easier to sell their shares in an underperforming
. firm than to monitor the management.
C. This may be rational to the extent that managers are answerable to the board of directors.
D. All of the above are explanations for the separation of ownership and control.
24. Free cash flow refers to
A. a firm's cash reserve in excess of tax obligation.
B. a firm's funds in excess of what's needed for undertaking all profitable projects.
C. a firm's cash reserve in excess of interest and tax payments.
D. a firm's income tax refund that is due to interest payments on borrowing.
25. The investors supply funds to the company but are not involved in the company's daily decision making.
As a result, many public companies come to have
A. strong shareholders and weak managers.
B. strong managers and weak shareholders.
C. strong managers and strong shareholders.
D. weak managers and weak shareholders.
26. The agency problem refers to the possible conflicts of interest between
A. self-interested managers as principals and shareholders of the firm who are the agents.
B. altruistic managers as agents and shareholders of the firm who are the principals.
C. self-interested managers as agents and shareholders of the firm who are the principals.
D. dutiful managers as principals and shareholders of the firm who are the agents.
27. Self-interested managers may be tempted to
A. indulge in expensive perquisites at company expense.
B. adopt anti-takeover measures for their company to ensure their personal job security.
C. waste company funds by undertaking unprofitable projects that benefit themselves but not
shareholders.
D. all of the above are potential abuses that self-interested managers may be tempted to visit upon
shareholders.
28. Suppose in order to defraud the shareholders, a manager sets up an independent company that he owns
sells the main company's output to this company. He would be tempted to set the transfer price
A. below market prices.
B. above market prices.
C. at the market price.
D. in accordance with GAAP.
29. Suppose in order to defraud the shareholders, a manager sets up an independent company that he owns
buys one of the main company's inputs of production from this company. He would be tempted to set the
transfer price
30. Why do managers tend to retain free cash flow?
A. Managers are in the best position to decide the best use of those funds.
B. These funds are needed for undertaking profitable projects and the issue costs are less than new issues
of stocks or bonds.
C. Managers may not be acting in the shareholders best interest, and for a variety of reasons, want to use
the free cash flow.
D. None of the above
31. Managerial entrenchment efforts are clear signs of the agency problem. They include
A. anti-takeover defenses.
B. poison pills.
C. changes in the voting procedures to make it more difficult for the firm to be taken over.
D. all of the above
32. In high-growth industries where companies' internally generated funds fall short of profitable investment
opportunities,
A. managers are less likely to waste funds in unprofitable projects.
B. managers are more likely to waste funds in unprofitable projects.
33. The agency problem tends
A. to be more serious in firms with free cash flows.
B. to be more serious in firms with excessive amounts of excess cash.
C. to be less serious in firms with few numbers of shareholders.
D. all of the above
34. In the graph at right, X, Y, and Z represent
A.
B.
C.
D.
entrenchment, alignment, entrenchment.

alignment, entrenchment, alignment.
misalignment and alignment.
agency costs of debt and equity.
35. In the graph at right, for Fortune 500 companies, X, Y are
A.
B.
C.
D.
5% and 25%.
15% and 50%.
50% and 75%.
None of the above
36. Which of the following is true regarding leveraged buy-outs (LBOs)?

A LBOs involve managers or buyout partners acquiring controlling interests in public companies, usually
. financed by heavy borrowing.
B. Concentrated ownership and high level of debt associated with LBOs are the mechanism for solving
the agency problem.
C. LBOs improve a company's free cash flow and this is the mechanism by which they can solve the
agency problem.
D. Both a and b
37. Tobin's Q is
A. the ratio of the market value of company assets to the replacement costs of the assets.
B.a means to find overvalued stocks: if Q is high it means that the cost to replace a firm's assets is greater
than the value of its stock.
C. the same as the price-to-book ratio.
D. Both a and b are correct
38. It is important for society as a whole to solve the agency problem, since the agency problem
A. leads to waste of scarce resources.
B. hampers capital market functions.
C. retards economic growth.
D. all of the above
39. In the U.S., the chief role of the board of directors is
A. to hire the management team.
B. to decide on the annual capital budget.
C. to design an effective incentive compatible compensation scheme for themselves.
40. In the United Kingdom, the majority of public companies
A. voluntarily abide by the Code of Best Practice on corporate governance.
B. are compelled by law to abide by the Code of Best Practice on corporate governance.
C. do not abide by the Code of Best Practice on corporate governance.
41. In Germany the corporate board is
A. legally charged with representing the interests of shareholders exclusively.
B. legally charged with looking after the interests of stakeholders (e.g., workers, creditors, etc.) in general,
not just shareholders.
C. legally charged as a supervisory board only.
D. legally charged as a management board only.
42. In the United States
A. boards of directors are legally responsible for representing the interests of the shareholders.
B due to the diffused ownership structure of the public company, management often gets to choose board
. members who are likely to be friendly to management.
C. there is a correlation between underperforming firms and boards of directors who are not fully
independent.
D. all of the above are true, in the United States.
43. In the United States, it is not uncommon for the same person to serve as both CEO and chairman of the
board.
A. This situation must not have much conflict of interest since it is common.
B. This situation has a built-in conflict of interest.
C. This is only legal if that individual owns a controlling number of shares in the firm.
44. Suppose you are the CEO of company A, and you serve on the board of company B, while the CEO of B
is on your board.
A. This is a potential conflict of interest for both parties.
B. This is normal and even a desirable situation since it allows for efficient information sharing between
the firms.
C. There is a potential conflict for the shareholders of the two firms.
D. All of the above are true.
45. In the United States, it is well documented that
A. boards dominated by their chief executives are prone to trouble.
B. public scrutiny can help improve corporate governance.
C. as public firms improve their corporate governance, the stock price goes up.
D. all of the above
46. The board of directors may grant stock options to managers. These are
A. call options.
B. put options.
C. none of the above
47. If an incentive contract specifies certain accounting performance

A. that accounting number will likely be the focus of managers.
B. managers will set aside the accounting goal if it conflicts with the goal of maximizing shareholder
wealth.
C. managers will be unable to manipulate the GAAP, so shareholders can be confident of having their
wealth maximized.
48. The board of directors may grant stock options to managers in order to
A. save executive compensation costs.
B. use as a substitute for bonus.
C. align the interest of managers with that of shareholders.
49. When designing an incentive contract,
Ait is important for the board of directors to set up an independent compensation committee that can
. carefully design the contract and diligently monitor manager's actions.
B senior executives can be trusted to not abuse incentive contracts by artificially manipulating accounting
. numbers since the auditors should look in to that.
C. the presence of any incentive is enough, whether it is accounting based or stock-price based.
D. the board of directors should always give the managers a "heads I win, tails you lose" type of option.
50. Concentrated ownership of a public company
A. is normal in the United States, following the well-publicized scandals of recent years.
B. is relatively rare in the United States and common in many other parts of the world.
C leads to a free-rider problem with the minority shareholders relying on the majority shareholders to
. assume an undue burden in monitoring the management.
D. is the norm in Great Britain.
51. Concentrated ownership of a public company
A. can be an effective way to alleviate the agency problem between shareholders and managers.
B. is the norm in Great Britain.
C. tends to be an ineffective way to alleviate conflicts of interest between groups of shareholders.
52. The goal of a greater accounting transparency
A. is to impose more rules and harsher penalties for their violation.
B. is to reduce the information asymmetry between corporate insiders and the public.
C. is to discourage managerial self-dealings.
D. answers b and c
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.
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 above is true
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. both a and b
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.
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. 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 above
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. both b and c
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.
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 above
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 above
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.
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% of shares outstanding of Samsung Life, which in turn holds
20% 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.
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.
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.
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. To formula to compute the value of the "block premium" is
A.
.
B.
.
C.
.
D.
.
78. One way to measure the value of private benefits of control
A. is to measure the difference in value between non-voting shares and voting shares.
B is to measure the value of the "block premium" the value difference between the price per share paid for
. a control block of shares versus the exchange price of regular shares.
C. both a and b
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.
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 above
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 above.
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. Both a and b
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.
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 an 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. CEO and CFO sign off the company's financial statements.
D. all of the above
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 above
87. The Sarbanes-Oxley Act of 2002
Ahas 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. a and b are both true
D. all of the above
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 above
89. The cost of compliance with the Sarbanes-Oxley Act
D. both a and c
90. The major components of the Sarbanes-Oxley Act are:
Aaccounting regulationThe 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 committeeThe company should appoint independent "financial experts" to its audit committee.
C internal control assessmentPublic companies and their auditors should assess the effectiveness of
. internal control of financial record keeping and fraud prevention.
Dexecutive responsibilityChief 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 above
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 above.
92. Since the passage of the Sarbanes-Oxley Act,
A some foreign firms choose 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.
93. The major components of the Sarbanes-Oxley Act include all of the following except
clients.
B. audit committeethe 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 responsibilityCEOs and CFOs must sign off on the company's financial statements.
94. The Cadbury Code of Best Practice
A. is the U.N. equivalent of the Sarbanes-Oxley Act.
B. is voluntary, but firms that fail to comply must explain why they choose not to comply.
C. has the force of law, like the Sarbanes-Oxley Act.
95. The Cadbury Code has not been legislated into law, and compliance with the code is voluntary.
AHowever, 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 above
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 above
98. Even though the compliance 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 above
99. The key requirements of the Cadbury Code of Best Practice state that
D. both a and b
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.
C. listed companies to have boards of directors with a majority of independents.
4 Key
1.
Countries with strong shareholder protection tend to have more valuable stock markets and more
companies listed on stock exchanges per capita than countries with weak protection.
TRUE
Eun - Chapter 04 #1
Topic: Capital Markets and Valuation
2.
Corporate governance can be defined as

Athe economic, legal, and institutional framework in which corporate control and cash flow rights are
. distributed among shareholders, managers and other stakeholders of the company.
B. the general framework in which company management is selected and monitored.
C. the rules and regulations adopted by boards of directors specifying how to manage companies.
D. the government-imposed rules and regulations affecting corporate management.
Eun - Chapter 04 #2
Topic: Corporate Governance
3.
When managerial self-dealings are excessive and left unchecked,

A. they can have serious negative effects on share values.
B. they can impede the proper functions of capital markets.
C. they can impede such measures as GDP growth.
D. all of the above
Eun - Chapter 04 #3
4.
Corporate governance structure

A. varies a great deal across countries.
B. has become homogenized following the integration of capital markets.
C. has become homogenized due to cross-listing of shares of many public corporations.
Eun - Chapter 04 #4
5.
The genius of public corporations stems from their capacity to allow efficient sharing or spreading of
risk among many investors, who can buy and sell their ownership shares on liquid stock exchanges
and let professional managers run the company on behalf of shareholders. This risk sharing stems
from
A. the liquidity of the shares.
B. the limited liability of shareholders.
C. the limited liability of bondholders.
D. the limited ability of shareholders.
Eun - Chapter 04 #5
Topic: Governance of the Public Corporation: Key Issues
6.
In a public company with diffused ownership, the board of directors is entrusted with
A. monitoring the auditors and safeguarding the interests of shareholders.
B. monitoring the shareholders and safeguarding the interests of management.
C. monitoring the management and safeguarding the interests of shareholders.
Eun - Chapter 04 #6
7.
The key weakness of the public corporation is

A. too many shareholders, which makes it difficult to make corporate decision.
B. relatively high corporate income tax rates.
C. conflicts of interest between managers and shareholders.
D. conflicts of interests between shareholders and bondholders.
Eun - Chapter 04 #7
8.
When company ownership is diffuse,

A. a "free rider" problem discourages shareholder activism.
Bthe large number of shareholders ensures strong monitoring of managerial behavior because with
. a large enough group, there's almost always someone who will to incur the costs of monitoring
management.
C. few shareholders have a strong enough incentive to incur the costs of monitoring management.
D. both a and c are correct
Eun - Chapter 04 #8
9.
In many countries with concentrated ownership

A. the conflicts of interest between shareholders and managers are worse than in countries with diffuse
ownership of firms.
B the conflicts of interest are greater between large controlling shareholders and small outside
. shareholders than between managers and shareholders.
C the conflicts of interest are greater between managers and shareholders than between large
. controlling shareholders and small outside shareholders.
D. corporate forms of business organization with concentrated ownership are rare.
Eun - Chapter 04 #9
10.
In what country do the three largest shareholders control, on average, about 60 percent of the shares of
a public company?
A. United States
B. Canada
C. Great Britain
D. Italy
Eun - Chapter 04 #10
11.
The public corporation

A. is jointly owned by a (potentially) large number of shareholders.
B. offers shareholders limited liability.
C. separates the ownership and control of a firms assets.
D. all of the above
12.
The key strengths of the public corporation is/are

A. their capacity to allow efficient risk sharing among many investors.
B. their capacity to raise large amounts of funds at relatively low cost.
C. their capacity to consolidate decision-making.
D. all of the above
13.
The central issue of corporate governance is

A. how to protect creditors from managers and controlling shareholders.
B. how to protect outside investors from the controlling insiders.
C. how to alleviate the conflicts of interest between managers and shareholders.
D. how to alleviate the conflicts of interest between shareholders and bondholders.
14.
In theory,
A.managers are hired by the shareholders at the annual stockholders meeting. If the managers turn in a
bad year, new ones get hired.
B. shareholders hire the managers to oversee the board of directors.
C. managers are hired by the board of directors; the board is accountable to the shareholders.
15.
In the reality of corporate governance at the turn of this century,

A. boards of directors are often dominated by management-friendly insiders.
B. a typical board of directors often has relatively few outside directors who can independently and
objectively monitor the management.
Cmanagers of one firm often sit on the boards of other firms, whose managers are on the board of the
. first firm. Due to the interlocking nature of these boards, there can exist a culture of "I'll overlook
your problems if you overlook mine."
D. all of the above have been true to a greater or lesser extent in the recent past.
16.
The strongest protection for investors is provided by

A. English common law countries, such as Canada, the United States, and the U.K.
B. French civil law countries, such as Belgium, Italy, and Mexico.
C. a weak board of directors.
D. socialized firms.
17.
The public corporation has a key weakness:

A. the conflicts of interest between bondholders and shareholders.
B. the conflicts of interest between managers and bondholders.
C. the conflicts of interest between stakeholders and shareholders.
D. the conflicts of interest between managers and shareholders.
18.
The separation of the company's ownership and control,

A.is especially prevalent in such countries as the United States and the United Kingdom, where
corporate ownership is highly diffused.
B. is especially prevalent in such countries as the Italy and Mexico, where corporate ownership is
highly concentrated.
C. is a rational response to the agency problem.
19.
In the United States, managers are legally bound by the "duty of loyalty" to
A. the board of directors.
B. the shareholders.
C. the bondholders.
D. the government.
20.
In the United States, managers are bound by the "duty of loyalty" to serve the shareholders.
A. This is an ethical, not legal, obligation.
B. This is a legal obligation.
C. This is only a moral obligation; there are no penalties.
21.
Outside the United States and the United Kingdom,

A. concentrated ownership of the company is more the exception than the rule.
B. diffused ownership of the company is more the exception than the rule.
C. partnerships are more important than corporations.
22.
A complete contract between shareholders and managers

A. would specify exactly what the manager will do under each of all possible future contingencies.
B. would be an expensive contract to write and a very expensive contract to monitor.
C. would eliminate any conflicts of interest (and managerial discretion).
D. all of the above
Topic: The Agency Problem
23.
Why is it rational to make shareholders "weak" by giving control to the managers of the firm?
A. This may be rational when shareholders may be neither qualified nor interested in making business
decisions.
B.This may be rational since many shareholders find it easier to sell their shares in an
underperforming firm than to monitor the management.
C. This may be rational to the extent that managers are answerable to the board of directors.
D. All of the above are explanations for the separation of ownership and control.
24.
Free cash flow refers to

A. a firm's cash reserve in excess of tax obligation.
B. a firm's funds in excess of what's needed for undertaking all profitable projects.
C. a firm's cash reserve in excess of interest and tax payments.
D. a firm's income tax refund that is due to interest payments on borrowing.
25.
The investors supply funds to the company but are not involved in the company's daily decision
making. As a result, many public companies come to have
A. strong shareholders and weak managers.
B. strong managers and weak shareholders.
C. strong managers and strong shareholders.
D. weak managers and weak shareholders.
26.
The agency problem refers to the possible conflicts of interest between

A. self-interested managers as principals and shareholders of the firm who are the agents.
B. altruistic managers as agents and shareholders of the firm who are the principals.
C. self-interested managers as agents and shareholders of the firm who are the principals.
D. dutiful managers as principals and shareholders of the firm who are the agents.
27.
Self-interested managers may be tempted to

A. indulge in expensive perquisites at company expense.
B. adopt anti-takeover measures for their company to ensure their personal job security.
C. waste company funds by undertaking unprofitable projects that benefit themselves but not
shareholders.
all
D. of the above are potential abuses that self-interested managers may be tempted to visit upon
shareholders.
28.
Suppose in order to defraud the shareholders, a manager sets up an independent company that he owns
sells the main company's output to this company. He would be tempted to set the transfer price
29.
Suppose in order to defraud the shareholders, a manager sets up an independent company that he owns
buys one of the main company's inputs of production from this company. He would be tempted to set
the transfer price
30.
Why do managers tend to retain free cash flow?

A. Managers are in the best position to decide the best use of those funds.
B. These funds are needed for undertaking profitable projects and the issue costs are less than new
issues of stocks or bonds.
C. Managers may not be acting in the shareholders best interest, and for a variety of reasons, want to
use the free cash flow.
31.
Managerial entrenchment efforts are clear signs of the agency problem. They include
A. anti-takeover defenses.
B. poison pills.
C. changes in the voting procedures to make it more difficult for the firm to be taken over.
D. all of the above
32.
In high-growth industries where companies' internally generated funds fall short of profitable
investment opportunities,
A. managers are less likely to waste funds in unprofitable projects.
B. managers are more likely to waste funds in unprofitable projects.
33.
The agency problem tends

A. to be more serious in firms with free cash flows.
B. to be more serious in firms with excessive amounts of excess cash.
C. to be less serious in firms with few numbers of shareholders.
D. all of the above
34.
In the graph at right, X, Y, and Z represent
A.
B.
C.
D.
entrenchment, alignment, entrenchment.

alignment, entrenchment, alignment.
misalignment and alignment.
agency costs of debt and equity.
Topic: Remedies for the Agency Problem
35.
In the graph at right, for Fortune 500 companies, X, Y are
A.
B.
C.
D.
5% and 25%.
15% and 50%.
50% and 75%.
None of the above
36.
Which of the following is true regarding leveraged buy-outs (LBOs)?

A LBOs involve managers or buyout partners acquiring controlling interests in public companies,
. usually financed by heavy borrowing.
B. Concentrated ownership and high level of debt associated with LBOs are the mechanism for
solving the agency problem.
C. LBOs improve a company's free cash flow and this is the mechanism by which they can solve the
agency problem.
D. Both a and b
37.
Tobin's Q is
A. the ratio of the market value of company assets to the replacement costs of the assets.
B. a means to find overvalued stocks: if Q is high it means that the cost to replace a firm's assets is
greater than the value of its stock.
C. the same as the price-to-book ratio.
D. Both a and b are correct
38.
It is important for society as a whole to solve the agency problem, since the agency problem
A. leads to waste of scarce resources.
B. hampers capital market functions.
C. retards economic growth.
D. all of the above
39.
In the U.S., the chief role of the board of directors is

A. to hire the management team.
B. to decide on the annual capital budget.
C. to design an effective incentive compatible compensation scheme for themselves.
Topic: Board of Directors
40.
In the United Kingdom, the majority of public companies

A. voluntarily abide by the Code of Best Practice on corporate governance.
B. are compelled by law to abide by the Code of Best Practice on corporate governance.
C. do not abide by the Code of Best Practice on corporate governance.
41.
In Germany the corporate board is

A. legally charged with representing the interests of shareholders exclusively.
B. legally charged with looking after the interests of stakeholders (e.g., workers, creditors, etc.) in
general, not just shareholders.
C. legally charged as a supervisory board only.
D. legally charged as a management board only.
42.
In the United States

A. boards of directors are legally responsible for representing the interests of the shareholders.
B due to the diffused ownership structure of the public company, management often gets to choose
. board members who are likely to be friendly to management.
C. there is a correlation between underperforming firms and boards of directors who are not fully
independent.
D. all of the above are true, in the United States.
43.
In the United States, it is not uncommon for the same person to serve as both CEO and chairman of
the board.
A. This situation must not have much conflict of interest since it is common.
B. This situation has a built-in conflict of interest.
C. This is only legal if that individual owns a controlling number of shares in the firm.
44.
Suppose you are the CEO of company A, and you serve on the board of company B, while the CEO of
B is on your board.
A. This is a potential conflict of interest for both parties.
B. This is normal and even a desirable situation since it allows for efficient information sharing
between the firms.
C. There is a potential conflict for the shareholders of the two firms.
D. All of the above are true.
45.
In the United States, it is well documented that

A. boards dominated by their chief executives are prone to trouble.
B. public scrutiny can help improve corporate governance.
C. as public firms improve their corporate governance, the stock price goes up.
D. all of the above
Topic: International Finance in Practice: When Boards Are All in the Family
46.
The board of directors may grant stock options to managers. These are
A. call options.
B. put options.
C. none of the above
Topic: Incentive Contracts
47.
If an incentive contract specifies certain accounting performance

A. that accounting number will likely be the focus of managers.
B. managers will set aside the accounting goal if it conflicts with the goal of maximizing shareholder
wealth.
C. managers will be unable to manipulate the GAAP, so shareholders can be confident of having their
wealth maximized.
48.
The board of directors may grant stock options to managers in order to

A. save executive compensation costs.
B. use as a substitute for bonus.
C. align the interest of managers with that of shareholders.
49.
When designing an incentive contract,

A it is important for the board of directors to set up an independent compensation committee that can
. carefully design the contract and diligently monitor manager's actions.
B senior executives can be trusted to not abuse incentive contracts by artificially manipulating
. accounting numbers since the auditors should look in to that.
C. the presence of any incentive is enough, whether it is accounting based or stock-price based.
D. the board of directors should always give the managers a "heads I win, tails you lose" type of
option.
50.
Concentrated ownership of a public company

A. is normal in the United States, following the well-publicized scandals of recent years.
B. is relatively rare in the United States and common in many other parts of the world.
C leads to a free-rider problem with the minority shareholders relying on the majority shareholders to
. assume an undue burden in monitoring the management.
D. is the norm in Great Britain.
Topic: Concentrated Ownership
51.
Concentrated ownership of a public company

A. can be an effective way to alleviate the agency problem between shareholders and managers.
B. is the norm in Great Britain.
C. tends to be an ineffective way to alleviate conflicts of interest between groups of shareholders.
52.
The goal of a greater accounting transparency

A. is to impose more rules and harsher penalties for their violation.
B. is to reduce the information asymmetry between corporate insiders and the public.
C. is to discourage managerial self-dealings.
D. answers b and c
Topic: Accounting Transparency
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.
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 above is true
Topic: Debt
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. both a and b
Topic: Debt
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.
Topic: Debt
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.
Topic: Debt
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. having a press conference and promising to be nice to their investors.
Topic: Overseas Stock Listings
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 above
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.
Topic: Market for Corporate Control
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. both b and c
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.
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 above
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.
Topic: Law and Corporate Governance
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 above
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.
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% of shares outstanding of Samsung Life, which in turn
holds 20% 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
Topic: Consequences of Law
Topic: Ownership and Control Pattern
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.
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.
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.
Topic: Private Benefits of Control
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.
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.
To formula to compute the value of the "block premium" is

A.
.
B.
.
C.
.
D.
.
78.
One way to measure the value of private benefits of control

A. is to measure the difference in value between non-voting shares and voting shares.
B is to measure the value of the "block premium" the value difference between the price per share paid
. for a control block of shares versus the exchange price of regular shares.
C. both a and b
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.
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 above
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 above.
Topic: Corporate Governance Reform
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. Both a and b
Topic: Objectives of Reform
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.
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 an 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. CEO and CFO sign off the company's financial statements.
D. all of the above
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 above
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. a and b are both true
D. all of the above
88.
The cost of compliance with the Sarbanes-Oxley Act

D. all of the above
89.
The cost of compliance with the Sarbanes-Oxley Act

D. both a and c
90.
The major components of the Sarbanes-Oxley Act are:

clients.
B. audit committeeThe company should appoint independent "financial experts" to its audit
committee.
C internal control assessmentPublic companies and their auditors should assess the effectiveness of
. internal control of financial record keeping and fraud prevention.
Dexecutive responsibilityChief 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 above
91.
The key requirements of the Sarbanes-Oxley Act state that

D. none of the above.
92.
Since the passage of the Sarbanes-Oxley Act,

A some foreign firms choose 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.
93.
The major components of the Sarbanes-Oxley Act include all of the following except
clients.
B. audit committeethe 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 responsibilityCEOs and CFOs must sign off on the company's financial statements.
94.
The Cadbury Code of Best Practice

A. is the U.N. equivalent of the Sarbanes-Oxley Act.
B. is voluntary, but firms that fail to comply must explain why they choose not to comply.
C. has the force of law, like the Sarbanes-Oxley Act.
Topic: The Cadbury Code of Best Practice
95.
The Cadbury Code has not been legislated into law, and compliance with the code is voluntary.
AHowever, 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 above
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 above
98.
Even though the compliance 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 above
99.
The key requirements of the Cadbury Code of Best Practice state that
D. both a and b
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.
C. listed companies to have boards of directors with a majority of independents.
4 Summary
Category
Eun - Chapter 04
Topic: Corporate Governance Reform
Topic: Debt
Topic: International Finance in Practice: When Boards Are All in the Family
# of Questions
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4

Corporate governance can be defined as

When managerial self-dealings are excessive and left unchecked,

Corporate governance structure

The key weakness of the public corporation is

When company ownership is diffuse,

In many countries with concentrated ownership

17. The public corporation has a key weakness:

34. In the graph at right, X, Y, and Z represent

entrenchment, alignment, entrenchment.

35. In the graph at right, for Fortune 500 companies, X, Y are

36. Which of the following is true regarding leveraged buy-outs (LBOs)?

47. If an incentive contract specifies certain accounting performance

56. For firms with free cash flows,

72. A pyramidal ownership structure is one in which

79. Several studies document the empirical link between

88. The cost of compliance with the Sarbanes-Oxley Act

Corporate governance can be defined as

When managerial self-dealings are excessive and left unchecked,

Corporate governance structure

The key weakness of the public corporation is

When company ownership is diffuse,

In many countries with concentrated ownership

The public corporation

The key strengths of the public corporation is/are

The central issue of corporate governance is

In the reality of corporate governance at the turn of this century,

The strongest protection for investors is provided by

The public corporation has a key weakness:

The separation of the company's ownership and control,

Outside the United States and the United Kingdom,

A complete contract between shareholders and managers

Free cash flow refers to

The agency problem refers to the possible conflicts of interest between

Self-interested managers may be tempted to

Why do managers tend to retain free cash flow?

The agency problem tends

In the graph at right, X, Y, and Z represent

entrenchment, alignment, entrenchment.

In the graph at right, for Fortune 500 companies, X, Y are

Which of the following is true regarding leveraged buy-outs (LBOs)?

In the U.S., the chief role of the board of directors is

In the United Kingdom, the majority of public companies

In Germany the corporate board is

In the United States

In the United States, it is well documented that

If an incentive contract specifies certain accounting performance

The board of directors may grant stock options to managers in order to

When designing an incentive contract,

Concentrated ownership of a public company

Concentrated ownership of a public company

The goal of a greater accounting transparency

For firms with free cash flows,

Benetton, an Italian clothier, is listed on the New York Stock Exchange.

In the United States and the United Kingdom, hostile takeovers

After a hostile takeover

In a hostile takeover attempt, the bidder typically

Private benefits of corporate control will tend to be higher in

Concentrated corporate ownership is most prevalent in

In countries with concentrated ownership

A pyramidal ownership structure is one in which

Unless investors can derive significant private benefits of control,

To formula to compute the value of the "block premium" is