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Q4. Which of the following firms is most likely to have the highest corporate governance effectiveness? ffice ffice" />
A) Firm D.
B) Firm C.
C) Firm A.
Correct answer is A)
Firm D is likely to have the highest corporate governance effectiveness. Because it has low liquidity, large shareholders will be more likely to push for change at the firm rather than just sell their shares. It also has the highest debt, which implies that the firm will have less cash sitting idle with which management can potentially squander. Firm D has more shares owned by large shareholders, who are likely to closely monitor management because they have a great deal at stake. Lastly, as recommended in the Cadbury report, director compensation is equity based.
Q5. Regarding Groh’s statements about active investors, are the statements correct?
Statement 1 Statement 2
A) Yes Yes
B) Yes No
C) No Yes
Correct answer is B)
There are limits to active investor effectiveness. First, active investors themselves are often unmonitored. Institutional investors rarely face the same pressure that they apply to corporations. They are not subject to proxy fights and do not carry debt. Corporate managers claim that institutional investors do not understand corporate management and that they are too focused on short-term returns. Active investors do not always have the same goals as the rest of the shareholders and may not monitor effectively.
The compensation for active investor managers is usually based on assets managed instead of performance.
Q6. Regarding Holman’s statements about active investors, are the statements correct?
Statement 1 Statement 2
A) Yes Yes
B) No No
C) No Yes
Correct answer is C)
In a proxy fight, an active investor attempts to get herself or her representative elected to the board of directors or to get a specific resolution adopted by the board. It is called a proxy fight because most shareholders do not attend the company meetings and authorize another party to vote on their behalf (i.e. they vote by proxy). Recent reforms in the ffice:smarttags" />U.S. have reduced the cost of proxy contests.
Individual investors hold larger proportions of firm equity in the U.S. than do investors in France, Germany, and Japan. Pension funds own more stock in the U.S. than in France, Germany, Italy, and Japan.
Q7. Which of the following statements regarding stock options as management compensation is most accurate?
A) When a stock option is out of the money, the manager has an incentive to take greater risk and its incentive effect is similar to that of stock compensation.
B) When a stock option is in the money, the manager has an incentive to take greater risk and its incentive effect is similar to that of stock compensation.
C) When a stock option is out of the money, the manager has an incentive to take greater risk. When it is in the money, its incentive effect is similar to that of stock compensation.
Correct answer is C)
When stock options are out of the money, managers have an incentive to take greater risks. The reason is that the option is worthless when the firm’s stock price is less than the option exercise price. If the option is currently in the money, a stock option is similar to stock in terms of its incentive effect. The only difference is that the option will provide lower compensation (the stock price minus the exercise price) relative to an outright payment of stock.
Q8. The board of directors of Worldwide Graphics has hired Bloom and Moore Consultants to investigate the corporate governance of Worldwide Graphics (WG). There have been some complaints from shareholders that the executives at WG have not been managing the firm in the best interest of the shareholders. The board of directors has requested an assessment of the managers’ incentive structure and an assessment of the decisions of the executives over the past few years. The board of directors specifically ask for Bloom and Moore to look for possible cases where WG executives are not acting in the best interests of WG shareholders. Furthermore, labor groups and the community where WG has its headquarters have been pressuring WG management to address the welfare of employees and the community. In essence, they want WG to maximize the welfare of all stakeholders and not just shareholders.
When given a job such as this, the consultants Fred Bloom and Steven Moore typically assess the board of directors and their incentive structure too. Bloom and Moore have found that poor corporate governance often starts with problems in the board of directors. Among their findings, Bloom and Moore find that only a small minority of the WG board members are WG executives, and the majority of all the board members serve on the boards of several other companies. Bloom feels that the members being on other boards is a good thing because it means the board members have a lot of experience. Bloom and Moore also find that the board members receive a flat fee and do not get stock options. Moore feels this fee structure is good because it increases the board members’ objectivity.
One of the accusations made by the shareholders is that WG executives have not been taking adequate risk. In essence, the shareholders have complained that the managers have been avoiding projects with higher risk and higher return because high risk projects have a higher probability of negative outcomes, which jeopardize the jobs of the managers. In examining the activities of WG managers, Bloom and Moore find that there had been a great deal of expansion and, in the past year, even an acquisition by WG of another firm. Bloom and Moore discuss if such expansion is incongruous with the accusation of WG managers not taking risk.
Bloom and Moore find that the executives of WG have been given stock options as part of their compensation, but the board members do not receive cash bonuses based upon the net income of WG. Bloom says that stock options help in aligning the interests of executives with shareholders, and bonuses based upon income would only be a substitute and not a compliment to stock options. Moore says that stock options and bonuses based upon income are more complements than substitutes. They also discuss if giving stock options to board members as compensation help motivate the board to monitor and direct the WG executives to act on behalf of the shareholders.
Bloom and Moore also recommend that WG use more debt in its financing. They both recognize that firms with higher total debt ratios seem to be managed better and in a fashion that has the shareholder interests in mind. Bloom says that a higher debt ratio leads to managers having less cash to siphon off to provide the executives with perks. Moore says that recent changes in the law, as a result of recent corporate scandals, have allowed debt-holders to form voting blocks to influence the board decisions.
There has been an outcry for WG executives to try to maximize the welfare of parties other than WG shareholders, e.g., employees and the community. In responding to this outcry, Bloom and Moore should:
A) point out that such pursuits are illegal given the fiduciary responsibility that WG executives have for WG shareholders.
B) point out that no adequate, widely-used metric for pursuing such a goal exists.
C) recommend that WG employ the Cadbury metric to pursue this goal.
Correct answer is B)
The only correct answer is that there is no widely-used and adequate metric for pursuing the goal of maximizing the welfare of multifarious stakeholders. It is legal, but there is no such thing as a Cadbury metric.
Q9. In their discussion concerning whether stock options and bonuses based upon income are substitutes or complements:
A) Bloom is correct and Moore is incorrect.
B) Bloom is incorrect and Moore is correct.
C) Bloom and Moore could both be correct. It depends upon the circumstances.
Correct answer is B)
It is true that stock options and bonuses are not substitutes because their values are based upon two different variables. The value of options is based upon market data, and the value of a bonus is based upon accounting income.
Q10. There are only a minority of executive directors on WG‘s board of directors, and most of the members are also members of other boards. With respect to the effectiveness of the board, the fact that there is only a minority of executives on the board is:
A) positive for board effectiveness, and the members being on other boards is positive for board effectiveness.
B) positive for board effectiveness, but the members being on other boards is negative for board effectiveness.
C) negative for board effectiveness, but the members being on other boards is positive for board effectiveness.
Correct answer is B)
Fewer executives on the board is usually seen as a positive thing for shareholders. One way WG executives could make the board less effective, however, is to see to it that the board members are on several other boards so that they are overcommitted and cannot perform well on the board of WG.
Q11. Bloom and Moore investigate whether AG executives have been avoiding risks and the effect of the executives expanding and making acquisitions.
A) These actions are both moral hazard problems, and they can occur together.
B) These actions are both moral hazard problems, but they are mutually exclusive.
C) Avoiding risks is a moral hazard problem, but making acquisitions is not a moral hazard problem.
Correct answer is A)
Managers avoiding risk is a moral hazard problem in that the managers avoid profitable ventures that have a good chance of increasing the value of the firm, but the venture could lead to the managers losing their job if the venture fails. Making acquisitions or “empire building” can be a problem. The acquisitions can be low risk and low return projects and congruous with the other case where the managers are not acting on behalf of the shareholders.
Q12. Bloom and Moore discuss whether to give the board of directors stock options as part of their compensation. Giving stock options to the board of directors:
A) has not proven effective at all in increasing the board’s incentives to act on behalf of shareholders.
B) can be effective, but it is usually too costly to implement.
C) can increase the board’s incentives to act on behalf of shareholders, but its effectiveness is limited.
Correct answer is C)
Providing directors with stock options rather than fixed fees goes in the right direction, but it has its limitations for the same reason that managers’ stock options have limitations. In particular, if the managers go for a risky strategy that reduces investor value but raises the value of their stock options, directors may have little incentive to oppose the move if they themselves are endowed with stock options.
Q13. In the discussion concerning why firms with a higher debt ratio may be run better and more in the interest of shareholders:
A) Bloom is correct and Moore is incorrect.
B) both Bloom and Moore are correct.
C) Bloom is incorrect and Moore is correct.
Correct answer is A)
Bloom is correct in that debt imposes a discipline and natural restriction on the use of the cash flow. Moore is wrong because there has not been any legislation concerning allowing debt-holders to form voting blocks.
Q14. If a manager is confident in her abilities, then:
A) implicit incentives such as the manager losing her job act as a complement for explicit incentives, such as stock options.
B) implicit incentives such as stock options act as a substitute for explicit incentives, such as the manager losing her job.
C) implicit incentives such as the manager losing her job act as a substitute for explicit incentives, such as stock options.
Correct answer is C)
Stock options are explicit incentives. An example of an implicit incentive would be the manager losing her job. If a manager is confident in her abilities, then she would be willing to accept a higher probability of being fired for increased compensation. In this case, a strong implicit incentive would be accompanied by an attractive compensation package and the two types of incentives would be measured as substitutes.
Q15. Which of the following statements regarding management compensation is most accurate?
A) Both bonuses and stock-based compensation largely reward a manager’s short-term efforts.
B) Bonuses largely reward a manager’s long-term efforts whereas stock-based compensation reflects more of the manager’s short-term efforts.
C) Bonuses largely reward a manager’s short-term efforts whereas stock-based compensation reflects more of the manager’s long-term efforts.
Correct answer is C)
Bonuses and stock-based compensation complement one another in the executive compensation package. They both serve different purposes. Bonuses, based on accounting figures, largely reward a manager’s short-term efforts whereas stock-based compensation reflects more of the manager’s long-term efforts.
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发表于 2009-3-10 15:30
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