Chapter 04 Corporate Governance Around the World

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 
 

A. the 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.
D. none of the above
 
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.

B. the 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.
D. none of the above
 
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.
C.  managers 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.
D. none of the above
 
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.
D. none of the above
 
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 
 

A. below market prices.

B. above market prices.
C.  at the market price.
D. in accordance with GAAP.
 
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. entrenchment, alignment, entrenchment.

B. alignment, entrenchment, alignment.
C.  misalignment and alignment.
D. agency costs of debt and equity.
 
35. In the graph at right, for Fortune 500 companies, X, Y are

    
 

A. 5% and 25%.

B. 15% and 50%.
C.  50% and 75%.
D. 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.
D. none of the above
 
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.
D. None of the above
 
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.
D. none of the above
 
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.
 
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.
D. none of the above
 
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.
D. none of the above
 
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
D. none of the above
 
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 above
 
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.
D. None of the above
 
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.
D. None of the above
 
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 above
 
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.
D. none of the above
 
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
D. None of the above
 
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 above
 
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 
 

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 
 

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. both a and c
 
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 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 
 

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 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.
D. none of the above
 
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 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 
 

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. 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.
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 above
 
Chapter 04 Corporate Governance Around the World 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 
 

A. the 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
Topic: Corporate Governance
 
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
 
Eun - Chapter 04 #4
Topic: Corporate Governance
 
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.
D. none of the above
 
Eun - Chapter 04 #6
Topic: Governance of the Public Corporation: Key Issues
 
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
Topic: Governance of the Public Corporation: Key Issues
 
8. When company ownership is diffuse, 
 

A. a "free rider" problem discourages shareholder activism.

B.  the 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
Topic: Governance of the Public Corporation: Key Issues
 
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
Topic: Governance of the Public Corporation: Key Issues
 
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
Topic: Governance of the Public Corporation: Key Issues
 
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
 
Eun - Chapter 04 #11
Topic: Governance of the Public Corporation: Key Issues
 
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
 
Eun - Chapter 04 #12
Topic: Governance of the Public Corporation: Key Issues
 
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.
 
Eun - Chapter 04 #13
Topic: Governance of the Public Corporation: Key Issues
 
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.
D. none of the above
 
Eun - Chapter 04 #14
Topic: Governance of the Public Corporation: Key Issues
 
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.
C.  managers 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.
 
Eun - Chapter 04 #15
Topic: Governance of the Public Corporation: Key Issues
 
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.
 
Eun - Chapter 04 #16
Topic: Governance of the Public Corporation: Key Issues
 
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.
 
Eun - Chapter 04 #17
Topic: Governance of the Public Corporation: Key Issues
 
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.
D. none of the above
 
Eun - Chapter 04 #18
Topic: Governance of the Public Corporation: Key Issues
 
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.
 
Eun - Chapter 04 #19
Topic: Governance of the Public Corporation: Key Issues
 
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.
 
Eun - Chapter 04 #20
Topic: Governance of the Public Corporation: Key Issues
 
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.
D. none of the above
 
Eun - Chapter 04 #21
Topic: Governance of the Public Corporation: Key Issues
 
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
 
Eun - Chapter 04 #22
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.
 
Eun - Chapter 04 #23
Topic: The Agency Problem
 
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.
 
Eun - Chapter 04 #24
Topic: The Agency Problem
 
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.
 
Eun - Chapter 04 #25
Topic: The Agency Problem
 
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.
 
Eun - Chapter 04 #26
Topic: The Agency Problem
 
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.
 
Eun - Chapter 04 #27
Topic: The Agency Problem
 
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.
 
Eun - Chapter 04 #28
Topic: The Agency Problem
 
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 
 

A. below market prices.

B.  above market prices.
C.  at the market price.
D. in accordance with GAAP.
 
Eun - Chapter 04 #29
Topic: The Agency Problem
 
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
 
Eun - Chapter 04 #30
Topic: The Agency Problem
 
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
 
Eun - Chapter 04 #31
Topic: The Agency Problem
 
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.
 
Eun - Chapter 04 #32
Topic: The Agency Problem
 
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
 
Eun - Chapter 04 #33
Topic: The Agency Problem
 
34. In the graph at right, X, Y, and Z represent

    
 

A. entrenchment, alignment, entrenchment.

B.  alignment, entrenchment, alignment.
C.  misalignment and alignment.
D. agency costs of debt and equity.
 
Eun - Chapter 04 #34
Topic: Remedies for the Agency Problem
 
35. In the graph at right, for Fortune 500 companies, X, Y are

    
 

A. 5% and 25%.

B.  15% and 50%.
C.  50% and 75%.
D. None of the above
 
Eun - Chapter 04 #35
Topic: Remedies for the Agency Problem
 
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
 
Eun - Chapter 04 #36
Topic: Remedies for the Agency Problem
 
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
 
Eun - Chapter 04 #37
Topic: Remedies for the Agency Problem
 
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
 
Eun - Chapter 04 #38
Topic: Remedies for the Agency Problem
 
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.
D. none of the above
 
Eun - Chapter 04 #39
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.
 
Eun - Chapter 04 #40
Topic: Board of Directors
 
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.
 
Eun - Chapter 04 #41
Topic: Board of Directors
 
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.
 
Eun - Chapter 04 #42
Topic: Board of Directors
 
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.
D. None of the above
 
Eun - Chapter 04 #43
Topic: Board of Directors
 
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.
 
Eun - Chapter 04 #44
Topic: Board of Directors
 
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
 
Eun - Chapter 04 #45
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
 
Eun - Chapter 04 #46
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.
 
Eun - Chapter 04 #47
Topic: Incentive Contracts
 
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.
D. none of the above
 
Eun - Chapter 04 #48
Topic: Incentive Contracts
 
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.
 
Eun - Chapter 04 #49
Topic: Incentive Contracts
 
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.
 
Eun - Chapter 04 #50
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.
D. none of the above
 
Eun - Chapter 04 #51
Topic: Concentrated Ownership
 
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
 
Eun - Chapter 04 #52
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.
D. none of the above
 
Eun - Chapter 04 #53
Topic: Accounting Transparency
 
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
 
Eun - Chapter 04 #54
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
D. none of the above
 
Eun - Chapter 04 #55
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.
D. none of the above
 
Eun - Chapter 04 #56
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.
 
Eun - Chapter 04 #57
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.
 
Eun - Chapter 04 #58
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
 
Eun - Chapter 04 #59
Topic: Overseas Stock Listings
 
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.
 
Eun - Chapter 04 #60
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
 
Eun - Chapter 04 #61
Topic: Market for Corporate Control
 
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.
 
Eun - Chapter 04 #62
Topic: Market for Corporate Control
 
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.
 
Eun - Chapter 04 #63
Topic: Market for Corporate Control
 
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
 
Eun - Chapter 04 #64
Topic: Market for Corporate Control
 
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.
 
Eun - Chapter 04 #65
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
 
Eun - Chapter 04 #66
Topic: Law and Corporate Governance
 
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 above
 
Eun - Chapter 04 #67
Topic: Law and Corporate Governance
 
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.
 
Eun - Chapter 04 #68
Topic: Law and Corporate Governance
 
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
 
Eun - Chapter 04 #69
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.
 
Eun - Chapter 04 #70
Topic: Consequences of Law
Topic: Ownership and Control Pattern
 
71. In countries with concentrated ownership 
 

A. hostile takeovers are quite rare.

B.  hostile takeovers are quite common.
 
Eun - Chapter 04 #71
Topic: Consequences of Law
Topic: Ownership and Control Pattern
 
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.
 
Eun - Chapter 04 #72
Topic: Consequences of Law
Topic: Ownership and Control Pattern
 
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 above
 
Eun - Chapter 04 #73
Topic: Consequences of Law
Topic: Ownership and Control Pattern
 
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.
 
Eun - Chapter 04 #74
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.
D. none of the above
 
Eun - Chapter 04 #75
Topic: 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.
 
Eun - Chapter 04 #76
Topic: Private Benefits of Control
 
77. To formula to compute the value of the "block premium" is 
 

A. 
.
B. 
.
C. 
.
D. 
.
 
Eun - Chapter 04 #77
Topic: Private Benefits of Control
 
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
 
Eun - Chapter 04 #78
Topic: Private Benefits of Control
 
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 above
 
Eun - Chapter 04 #79
Topic: Capital Markets and Valuation
 
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
 
Eun - Chapter 04 #80
Topic: Capital Markets and Valuation
 
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.
 
Eun - Chapter 04 #81
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
D. None of the above
 
Eun - Chapter 04 #82
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.
D. none of the above
 
Eun - Chapter 04 #83
Topic: Objectives of Reform
 
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.
 
Eun - Chapter 04 #84
Topic: Objectives of Reform
 
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
 
Eun - Chapter 04 #85
Topic: Objectives of Reform
 
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
 
Eun - Chapter 04 #86
Topic: Objectives of Reform
 
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
 
Eun - Chapter 04 #87
Topic: Objectives of Reform
 
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
 
Eun - Chapter 04 #88
Topic: Objectives of Reform
 
89. 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. both a and c
 
Eun - Chapter 04 #89
Topic: Objectives of Reform
 
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 above
 
Eun - Chapter 04 #90
Topic: Objectives of Reform
 
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.
 
Eun - Chapter 04 #91
Topic: Objectives of Reform
 
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.
 
Eun - Chapter 04 #92
Topic: Objectives of Reform
 
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.
 
Eun - Chapter 04 #93
Topic: Objectives of Reform
 
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.
D. none of the above
 
Eun - Chapter 04 #94
Topic: The Cadbury Code of Best Practice
 
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 above
 
Eun - Chapter 04 #95
Topic: The Cadbury Code of Best Practice
 
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.
 
Eun - Chapter 04 #96
Topic: The Cadbury Code of Best Practice
 
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
 
Eun - Chapter 04 #97
Topic: The Cadbury Code of Best Practice
 
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
 
Eun - Chapter 04 #98
Topic: The Cadbury Code of Best Practice
 
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. both a and b
 
Eun - Chapter 04 #99
Topic: The Cadbury Code of Best Practice
 
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 above
 
Eun - Chapter 04 #100
Topic: The Cadbury Code of Best Practice
 
Chapter 04 Corporate Governance Around the World Summary
 
Category #  of  Questions
Eun - Chapter 04 100
Topic: Accounting Transparency 2
Topic: Board of Directors 6
Topic: Capital Markets and Valuation 3
Topic: Concentrated Ownership 2
Topic: Consequences of Law 5
Topic: Corporate Governance 3
Topic: Corporate Governance Reform 1
Topic: Debt 4
Topic: Governance of the Public Corporation: Key Issues 17
Topic: Incentive Contracts 4
Topic: International Finance in Practice: When Boards Are All in the Family 1
Topic: Law and Corporate Governance 4
Topic: Market for Corporate Control 5
Topic: Objectives of Reform 12
Topic: Overseas Stock Listings 2
Topic: Ownership and Control Pattern 5
Topic: Private Benefits of Control 5
Topic: Remedies for the Agency Problem 5
Topic: The Agency Problem 12
Topic: The Cadbury Code of Best Practice 7