1.

How debt can work as a disciplinary mechanism for management

Ans:
Debt as a disciplinary mechanism
When a company has debt, it typically has to fulfil yearly interest payments that were made.
Debt imposes a disciplinary mechanism for management because, unlike dividends, which are
not legally required to be paid because nothing is promised to the shareholders, interest must
be paid because it is a fixed annual obligation. This means that, even in times of financial
hardship, management must manage and pay off the outstanding debt in a disciplined manner.
Some important factors are
 It limits management discretion because the company has obligations, which
discourages excessive spending. 
 It also encourages management to keep away of high expenditures.
 Other covenants and the debt contracts also place limitations on management.
 In the event that a company does not uphold its obligations, control may be transferred
to creditors.

2. Briefly explain the role of banks in CG. Your answer should incorporate both the
arguments; in favor and against
Ans:
Role of banks in CG
Banks can either own stock in a company or serve as its main source of funding. Therefore, a
bank may simultaneously hold equity and lend money. There may be some restrictions, but if
they own stock in the company, they have the right to vote through a proxy.
In addition, banks can keep an eye on the businesses they lend to and develop long-term
relationships with them to ensure that the business receives favorable interest rates and has a
single lender.
In Favor
 The fact that it reduces issues brought on by informational asymmetry is one of the
arguments in its favor. Due to their relationship, banks have access to information that
shareholders do not. 
  This information can lessen the information asymmetries in cases where the bank is a
shareholder or acting on their behalf. 
 The bank can determine whether there is poor management or temporary liquidity, just
like when seeking outside funding.
 Banks serve as monitor to ensure that a company is using its resources properly and
exerting enough effort.
Against
 Despite having equity, banks do not act in the best interests of their shareholders.
 The bank favors a merger between a risky borrower and a strong competitor to ensure
loan repayment, but other company owners may not agree that it is the best course of
action.
 Covenants can be enforced if the bank is the only lender, and they may be accepted by
the company if it wants to receive favorable interest rates.
3. Securities analyst play a role of CG monitors. Explain
Ans:
Securities analyst as CG monitors
For potential stock investors, security analysts rank stocks. Since there are two different
categories of securities analysts,
I. Buy-side analysts
For pension funds and individual investors, they manage the money and offer advice on
whether to buy, sell, or hold a particular security.
II. Sell-side analysts
They consider operating and financial conditions, long- and short-term prospects,
management effectiveness, and the sector to which a firm belongs when making public
recommendations and earnings forecasts.
As both analysts are involved with the company and keep tabs on its investments and other
financial decisions as well as offer recommendations on its behalf, the company can act
effectively to raise ratings, increase EPS, and provide better security analyst recommendations.
They perform their function as corporate governance monitors in this manner.
4. Briefly describe the role of credit rating agencies as monitor of corporate behavior.
Also shed some light on the role played by credit rating agencies in the failure of
WorldCom.
Ans:
Role of credit rating agencies as monitor of corporate behavior
Bonds are rated by credit rating agencies for prospective bond investors. They perform well
because an investor relies on their ratings for a specific firm to make all of their investment
decisions. As a result, the company works to enhance its operations and adhere to corporate
governance principles in order to gain a higher rating and access to the market's lowest interest
rate opportunities.
Similar to this, when a company starts to struggle financially, credit agencies lower their ratings
for its securities, and if the firm's situation worsens, the ratings also drop so they have to pay
higher interests.
Role played by credit rating agencies in the failure of WorldCom
In May 2001, WorldCom issued bonds totaling $11.9 billion, an American record, of which $10.1
billion was brand-new funding. The enormous debt issue was rated investment grade by
Standard & Poor's with a BBB+ and A3 by Moody's. Due to its $30 billion in debt, WorldCom's
debt was downgraded to junk status by credit rating agencies in May 2002. The following year,
WorldCom disclosed that over the previous five quarters, they had incorrectly recorded $3.8
billion in capital investments as operating expenses. However, despite this, the credit rating was
still high, which made it difficult to accept.
5. Case study: How has ENRON failed to inform the public about its high degree of
financial leverage leading to the enormous risks that would eventually cause the
firm to collapse? Would it have made any difference for shareholders to know
about the financial manipulations by the management of ENRON?
Ans:
How has ENRON failed?
Enron covered up sensitive information and the poor management performance while
manipulating the financial statements to make it appear as though everything was going
according to plan. They were aware that they would fail even after analyzing their financial
situations. The banks asked the credit agencies to postpone downgrading Enron and give them
time to look for additional capital if the rating agencies downgraded Enron to junk status.
However, Enron declared bankruptcy after a month.
Would it have made any difference for shareholders?
Yes, shareholders could have acted against management's performance and voted against the
board of directors, or some might have sold their stocks earlier, had they known about the
financial manipulations by ENRON management.