Question 1

The stockholder-lender conflict generally becomes greater
A) the smaller the firm.
B) the larger the firm.
C) the more the firm borrows from banks.
D) the less the firm borrows from banks.

Accepted Answer

The stockholder-lender conflict is greater when the firm is smaller because the firm has less assets to cover its debts. This means that the stockholders are more likely to lose their investment if the firm defaults on its loans.

Question 2

__________ occurs because firm owners have an incentive to understate their true riskiness to borrow on a more favorable basis.
A) Moral hazard
B) Adverse selection
C) Manager-stockholder conflict
D) Manager-lender conflict

Accepted Answer

Adverse selection refers to the problem that arises when one party has more information than the other party in a transaction, resulting in the second party being at a disadvantage. In this case, firm owners may have more information about the true riskiness of their business, which could lead them to understate it to lenders in order to obtain more favorable borrowing terms.

Question 3

Japan and Germany are two major __________-oriented systems.
A) securities
B) equities
C) banking
D) markets

Accepted Answer

Both Japan and Germany have strong banking systems that play a significant role in their economies. In Japan, the banking system is dominated by large, traditional banks that have close relationships with their corporate clients (known as keiretsu). Similarly, in Germany, the banking system is characterized by a network of regional and cooperative banks, known as Sparkassen and Volksbanken, which provide financing to small and medium-sized enterprises. While both countries also have securities markets and equity-oriented systems, their banking systems are a defining feature of their economies.

Question 4

Germany and __________ are two major banking-oriented systems.
A) the United Kingdom
B) Japan
C) France
D) the United States

Accepted Answer

Germany and Japan are known for their bank-oriented financial systems, where banks play a central role in corporate financing and governance.

Question 5

In privately held firms the manager-stockholder conflict is
A) worse than in the larger firm.
B) the same as it is in the larger firm.
C) less severe than in the larger firm.
D) there is no manager-stockholder conflict because the manager is the owner.

Accepted Answer

The answer of In privately held firms the manager-stockholder conflict...

Question 6

When the owners of a company hire full-time executives to make the day-to-day decisions, this __________ the __________ problem.
A) alleviates; stockholder-lender
B) alleviates; manager-stockholder
C) exacerbates; stockholder-lender
D) exacerbates; manager-stockholder

Accepted Answer

Hiring full-time executives can exacerbate the manager-stockholder problem as it may lead to conflicts of interest between the managers (executives) and the stockholders, where managers may not always act in the best interest of the stockholders.

Question 7

Asymmetric information problems are less severe the __________ the borrowing firm, since there is __________ publicly available information about those firms.
A) larger; more
B) larger; less
C) smaller; more
D) smaller; less

Accepted Answer

Larger firms tend to have more publicly available information, which reduces the severity of asymmetric information problems.

Question 8

The United States and __________ are two major markets-oriented systems.
A) Germany
B) Japan
C) France
D) the United Kingdom

Accepted Answer

The United States and the United Kingdom are both known for having market-oriented economic systems, characterized by minimal government intervention and a focus on free-market principles.

Question 9

The manager-stockholder conflict generally becomes worse
A) the smaller the firm.
B) the larger the firm.
C) the more the firm borrows from banks.
D) the less the firm borrows from banks.

Accepted Answer

The larger the firm, the more dispersed ownership tends to be, which makes it more difficult for shareholders to monitor management and hold them accountable for their actions. This can exacerbate conflict between managers and shareholders. Additionally, larger firms tend to have more complex operations and strategic decision-making processes, which can make it harder for shareholders to understand and evaluate managerial decisions. Therefore, the manager-stockholder conflict generally becomes worse in larger firms.

Question 10

When there are many thousands of small stockholders in a company, for each the cost of monitoring manager performance is well __________ the benefits of doing so, which helps __________ the manager-stockholder problem.
A) above; alleviates
B) above; brings on
C) below; alleviates
D) below; brings on

Accepted Answer

When the cost of monitoring is above the benefits, it discourages stockholders from monitoring, which exacerbates or "brings on" the manager-stockholder problem.

Question 11

__________ occurs because firms have an incentive to become riskier after their loans are funded.
A) Moral hazard
B) Adverse selection
C) Manager-stockholder conflict
D) Manager-lender conflict

Accepted Answer

Moral hazard refers to the possibility that one party may take risks because they know that another party bears the cost of those risks. In this case, firms may become riskier after their loans are funded because they know that the lenders bear the cost of any losses that may occur. This creates an incentive for the firms to behave recklessly or take on more risk than they otherwise would if they were using their own funds.

Question 12

In closely held firms, the manager-stockholder conflict is
A) worse than in the larger firm because there is no incentive for the individual stockholder to monitor managers.
B) the same as in publicly held firms.
C) less severe than in the larger firm because there is an incentive for the major stockholder to monitor managers.
D) less pronounced than in large public companies, because the manager is the owner.

Accepted Answer

The answer of In closely held firms, the manager-stockholder conflict...

Question 13

Chapter 16 on "Financial System Design" calls the asymmetric information problem discussed in earlier chapters the __________ conflict.
A) manager-stockholder
B) stockholder-lender
C) manager-lender
D) profit-risk

Accepted Answer

The asymmetric information problem in financial systems often refers to the stockholder-lender conflict, where stockholders may have more information about the firm's risk than lenders, leading to potential conflicts of interest.

Question 14

The United States and the United Kingdom are two major __________-oriented systems.
A) securities
B) equities
C) banking
D) markets

Accepted Answer

Both the United States and the United Kingdom have market-oriented economic systems, characterized by a decentralized approach to economic decision-making and a reliance on market forces to allocate resources. This can be seen in their emphasis on free trade, private enterprise, and competition in their respective domestic and international markets. While securities, equities, and banking are important components of their financial systems, they are not the defining feature of their economic systems.

Question 15

Financial systems have all but which of the following in common?
A) market-oriented emphasis
B) payments systems
C) central banks
D) information asymmetries

Accepted Answer

Market-oriented emphasis is not a common feature of all financial systems, as some systems may be more heavily regulated or state-oriented.

Question 16

Of the two conflicts, __________ get(s)more severe the larger the firm.
A) the stockholder-lender conflict
B) manager-stockholder conflict
C) both
D) neither

Accepted Answer

As the size of the firm increases, the separation between ownership (stockholders) and management also increases. This creates a greater potential for conflicts of interest between managers and stockholders, as managers may prioritize their own interests over those of the shareholders. Meanwhile, the stockholder-lender conflict remains relatively constant regardless of firm size, as both parties are typically focused on maximizing financial returns.

Question 17

Because of their __________ liability, corporate stockholders are more concerned with __________.
A) limited; success than failure
B) limited; failure than success
C) unlimited; success than failure
D) unlimited; failure than success

Accepted Answer

Corporate stockholders have limited liability, meaning that they can only lose the amount of money invested in the corporation. Therefore, they are more concerned with the success of the corporation than its failure. If the corporation fails, they will only lose their investment, but if it succeeds, they may gain significant profits.

Question 18

The fewer the stockholders in a corporation the __________ likely they are to be motivated to monitor the corporation's management, thus the __________ the severity of the manager-stockholder conflict.
A) more; greater
B) more; fewer
C) less; greater
D) less; fewer

Accepted Answer

The answer of The fewer the stockholders in a corporation...

Question 19

The two major types of financial systems are the __________-oriented systems.
A) federal- and local
B) banking- and markets
C) securities- and equities
D) contributor- and stockholder

Accepted Answer

The two major types of financial systems are banking-oriented systems and market-oriented systems. Banking-oriented systems rely heavily on banks to provide financing, while market-oriented systems rely on securities markets and other financial markets to provide financing. The other choices are not accurate descriptions of the major types of financial systems.

Question 20

Asymmetric information problems are worse the __________ the borrowing firm, since there is __________ publicly available information about those firms.
A) larger; more
B) larger; less
C) smaller; more
D) smaller; less

Accepted Answer

Asymmetric information problems are more severe for smaller firms because there is less publicly available information about them, making it harder for lenders to assess their creditworthiness.

Quiz 16: Financial System Design

The stockholder-lender conflict generally becomes greater

__________ occurs because firm owners have an incentive to understate their true riskiness to borrow on a more favorable basis.

Japan and Germany are two major __________-oriented systems.

Germany and __________ are two major banking-oriented systems.

In privately held firms the manager-stockholder conflict is

When the owners of a company hire full-time executives to make the day-to-day decisions, this the problem.

Asymmetric information problems are less severe the the borrowing firm, since there is publicly available information about those firms.

The United States and __________ are two major markets-oriented systems.

The manager-stockholder conflict generally becomes worse

When there are many thousands of small stockholders in a company, for each the cost of monitoring manager performance is well the benefits of doing so, which helps the manager-stockholder problem.

__________ occurs because firms have an incentive to become riskier after their loans are funded.

In closely held firms, the manager-stockholder conflict is

Chapter 16 on "Financial System Design" calls the asymmetric information problem discussed in earlier chapters the __________ conflict.

The United States and the United Kingdom are two major __________-oriented systems.

Financial systems have all but which of the following in common?

Of the two conflicts, __________ get(s) more severe the larger the firm.

Because of their liability, corporate stockholders are more concerned with .

The fewer the stockholders in a corporation the likely they are to be motivated to monitor the corporation's management, thus the the severity of the manager-stockholder conflict.

The two major types of financial systems are the __________-oriented systems.

Asymmetric information problems are worse the the borrowing firm, since there is publicly available information about those firms.