Question 1

Which one of the following statements as to the theoretical impact of competition on managerial performance and firm value is true?&#10;A)Competition always increases managerial performance.&#10;B)Competition may reduce as well as increase managers' incentives to work hard.&#10;C)The positive income effect dominates only under certain, specific conditions.&#10;D)Both B and C are correct.

Accepted Answer

Option B is correct as competition may decrease managerial incentives to work hard as they may feel discouraged by the pressure or may have reduced market power leading to reduced profit margins. Option C is also correct as the positive income effect dominates only under certain specific conditions like when competition leads to improvements in efficiency, innovation or customer service. Therefore, both B and C are correct.

Question 2

Studies analysing the impact of managerial ownership on firm value have found ...&#10;A)evidence that managerial ownership increases firm value, but only when the latter is assumed to be exogenous.&#10;B)consistent evidence that managerial ownership increases firm value.&#10;C)that managerial ownership destroys firm value.&#10;D)None of the above.

Accepted Answer

Studies have found evidence that managerial ownership increases firm value, but only under certain conditions. When firm value is assumed to be exogenous, meaning that it is influenced by factors outside of the control of the firm's managers, managerial ownership has been found to have a positive impact. However, when endogeneity is not controlled for, the relationship between managerial ownership and firm value becomes less clear, and studies have found mixed results. Therefore, choice A is the most accurate answer.

Question 3

Dividends may fulfil a corporate governance role.&#10;A)Forcing managers to pay out high dividends reduces the free-cash-flow problem.&#10;B)Forcing managers to pay out high dividends is one way of addressing the principal-agent problem.&#10;C)Dividends have been shown to be less flexible in the UK and the USA compared to Germany.&#10;D)All of the above are correct.

Accepted Answer

Dividends can play a role in corporate governance by reducing the free-cash-flow problem, thereby limiting the funds available for managers to invest in negative NPV projects. This addresses the principal-agent problem by aligning the interests of the managers with those of the shareholders. The flexibility of dividend policies varies by country, affecting how dividends can be used in corporate governance.

Question 4

The empirical evidence on institutional investors suggests the following:&#10;A)They are always passive.&#10;B)They are typically active investors.&#10;C)They tend to be mostly passive, but some of them act behind the scenes.&#10;D)None of the above.

Accepted Answer

Institutional investors tend to be mostly passive investors, but some of them act behind the scenes by exerting influence on management, engaging in private discussions with companies, and voting on important issues at shareholder meetings. However, it is important to note that not all institutional investors behave in the same way and their level of activity may vary depending on their investment strategy, objectives, and preferences.

Question 5

Which one of the following statements is correct?&#10;A)Proxy contests in the USA tend to result in an increase in the targeted firm's stock price.&#10;B)Proxy contests in the Europe normally cause a drop in the stock price of the targeted firm.&#10;C)While their outcome is not binding for the management, proxy contests in the USA are more likely to earn shareholder approval than in Europe.&#10;D)All of the above.

Accepted Answer

Proxy contests in the USA tend to result in an increase in the targeted firm's stock price, as they signal that the firm is undervalued and that there is potential for a takeover premium. Proxy contests in Europe normally cause a drop in the stock price of the targeted firm, as they are seen as a sign of instability and uncertainty. While their outcome is not binding for the management, proxy contests in the USA are more likely to earn shareholder approval than in Europe, as US shareholders have more power and are more likely to vote in favor of proposals that they believe will benefit them.

Question 6

Which one of the following statements is correct?&#10;A)Only proxy votes exercised by banks seem to have a positive effect on firm performance.&#10;B)Bank ownership of equity has been show generally to have a negative effect on firm performance.&#10;C)The empirical evidence is as yet inconclusive about the effects of bank ownership on firm performance.&#10;D)None of the above.

Accepted Answer

The statement that proxy votes exercised by banks have a positive effect on firm performance (statement A) is not supported by empirical evidence. Similarly, the statement that bank ownership of equity generally has a negative effect on firm performance (statement B) is also not supported by empirical evidence. Overall, the empirical evidence on the effects of bank ownership on firm performance is inconclusive, hence statement C is the correct option.

Question 7

Which one of the following statements is correct?&#10;A)Managerial compensation has been shown to be sensitive to firm size.&#10;B)The components of managerial compensation as well as their importance vary across countries.&#10;C)Managerial compensation has been shown to be sensitive to firm performance.&#10;D)All of the above.

Accepted Answer

The statement A is true because research has shown a positive relationship between firm size and managerial compensation. 
The statement B is also true because cultural and institutional factors influence the components of managerial compensation and their relative importance in different countries. 
The statement C is true as well because managerial compensation is often linked to firm performance measures such as profitability, stock price, and growth. Therefore, all three statements are correct and the correct answer is D.

Question 8

Empirical studies suggest that targets of hostile takeovers ...&#10;A)are more likely to be continental European companies rather than UK and US companies.&#10;B)have weaker pre-acquisition performance than targets of friendly takeovers and non-acquired firms.&#10;C)have better pre-acquisition performance than targets of friendly takeovers and non-acquired firms.&#10;D)do not differ in terms of their pre-acquisition performance when compared to targets of friendly takeovers and non-acquired firms.

Accepted Answer

The answer of Empirical studies suggest that targets of hostile...

Deck 8: Incentivizing Managers and Disciplining of Badly Performing Managers