Group 7: Exam Questions

11, 13, 18, 23b, 30

Problem 11
a. There is a negative relationship between firms performance and
fraction of Employee Directors
Why??? Employees will try to protect their human capital invested in the
company by opposing the projects that they fear may decrease their
benefits.
Intensify the decision complexity and result in decision making less
effective
b. Mandatory Employee Directors
Strongest impact on firms performance
Employee have more incentives and power to make decision beneficial
for themselves at the expense of stockholders
c. Gender diversity should not be increased. A rise in the proportion of
shareholder-elected female directors worsens the performance of the
firm
d. Model must control for:
- Firms size: There is a consistent correlation between firms size and
value creation in asset-pricing tests
- Risks: To corporate the impact of cash flow uncertainty on firm value

Problem 24b
Question: Staggered board makes the firm
more exposed to takeover attempts
Answer: False. Staggered board is one of
the takeover defences

Why??? A staggered board (classified board)

is segmented into classes, typically three,
with only one class of directors coming up
for election in a given year
it takes longer time to replace a majority
(normally two thirds) to make a decision
of accepting the bid
a more independent board is more likely
to reject the initial bid and demand higher
revised bid, making it difficult to take over
the targeted firm

Problem 13
a. Endogeneity means:
Information provision is affected by board independence: CEO
provides less information to more independent board
Assumptions:
- More information, better monitoring & advice
- Independent directors have stronger monitoring incentives than
dependent directors
- CEO like advices, not like monitoring
b. The relationship may not positive because:
- CEO is unwilling to share information with more independent
board
- Trade-off between monitoring and advice

Problem 20
a. 1-tier board
- Advantage: non-executive directors have enough information,
better monitoring.
- Disadvantage: non-executive directors are not independent
from executive directors.
b. The concentrated ownership with strong control firms would
benefit the least:
- The board has already been independent from managers
- A too powerful owner takes control and runs firm in his way
without the need of an independent board

Problem 18
a. The fraction of male directors has been set at optimal level:
Its marginal effect on firms performance is 0
Its corresponding coefficient is expected to be 0
b. - The optimal fraction of women on the board may vary from firm to
firm.
- If a regulation mandates the same fraction of male directors in every
firm, it may damage the optimal fraction of gender in each firm and do
harm to firms value

Problem 30
a. Mitigate agency problems in concentrated-ownership-firms:

- Independent directors have no or little relation with large shareholders, have less
to lose in fight with powerful owners and thus leads to better monitoring
- Ensure that managers act in most shareholders' interests and mitigate agency
problem.
b. How CEO and board react when board independence increases:
- CEO tend to be less willing to provide firm-specific information to board.
- Negative advice effect of the board without enough information, reduces boards
performance.