Question 1

When the option strike prices in an executive stock option-based compensation plan have been lowered it is usually a defense to a hostile takeover.

Accepted Answer

Lowering strike prices in an executive stock option-based compensation plan is not typically used as a defense against a hostile takeover. Other strategies, such as implementing a poison pill, would be more appropriate for this purpose.

Question 2

Stock option repricing where the strike price value of the option has been lowered from its original position sometimes happens when firm performance is poor.

Accepted Answer

When a company's performance is poor, the value of the underlying stock may decrease, making the original strike price of the option unattractive. In this case, the company may choose to reprice the stock option by lowering the strike price in order to incentivize employees and executives to stay with the company and work to improve its performance.

Question 3

The market for corporate control may not be as efficient as a governance device as theory suggests because takeover targets are not always low performers with weak governance.

Accepted Answer

The statement is true. Theory suggests that the market for corporate control is an efficient governance device because it allows for the takeover of underperforming companies with weak governance. However, in reality, takeover targets may not always fit this criteria and can include high-performing companies with strong governance. Thus, the market for corporate control may not be as efficient as theory suggests.

Question 4

Managers in firms that have been subjects of hostile takeovers usually find that their value to the new firm has been enhanced because of their in-depth insider knowledge.

Accepted Answer

The answer of Managers in firms that have been subjects...

Question 5

Hedge funds,as part of the market for corporate control,identifies a firm that is underperforming and then invests in it with the goal of improving that firm's performance.

Accepted Answer

Hedge funds are known for identifying undervalued or underperforming companies and investing in them with the aim of improving their financial performance and eventually generating returns for their investors. It is one of the strategies employed in the market for corporate control.

Question 6

For top-level managers,board acceptance of the acquiring firm's offer usually leads to job loss as the acquiring firms wants new leadership. If the offer is refused,however,the job loss risk is minimal.

Accepted Answer

The risk of job loss for top-level managers can still be significant even if the offer is refused, as the company may face other challenges or pressures that could lead to leadership changes.

Question 7

The top management of RavenCrest,Inc. have significant stock options in RavenCrest. They are therefore more likely to gain in making an agreement to be acquired,especially if they have golden parachutes.

Accepted Answer

Top management with significant stock options in RavenCrest would benefit financially from an acquisition, especially if they have golden parachutes (severance packages that provide significant payouts in the event of a merger or acquisition). This could create a conflict of interest where their desire for personal financial gain may influence their decision-making regarding an acquisition.

Question 8

The use of executive compensation as a governance mechanism is more challenging to firms implementing international strategies than those strictly operating domestically.

Accepted Answer

Firms operating internationally face additional complexities such as cultural differences, varying legal frameworks, and exchange rate fluctuations when it comes to executive compensation. These factors can make it more challenging to use executive compensation as a governance mechanism compared to firms operating strictly domestically.

Question 9

Executive compensation is a governance mechanism that seeks to align the interests of managers and owners through salaries,bonuses,and long-term incentive compensation such as stock awards and options.

Accepted Answer

Executive compensation is indeed a governance mechanism aimed at aligning the interests of managers and owners through various forms of compensation. This helps ensure that executives are incentivized to act in the best interests of the company and its shareholders.

Question 10

The performance of individual board members and entire boards are being evaluated more formally and with greater intensity than in years past.

Accepted Answer

This statement is true, as there is a growing trend towards formal and rigorous evaluations of both individual board members and entire boards. This is seen as a way to ensure accountability, transparency, and effectiveness in governance.

Question 11

The market for corporate control is composed of individuals and firms that buy ownership positions or take over potentially undervalued corporations and make changes to those corporations,including the replacement of the top managers.

Accepted Answer

The statement accurately describes the market for corporate control.

Question 12

The most effective defense against a hostile takeover is the poison pill strategy.

Accepted Answer

The poison pill strategy is considered the most effective defense against a hostile takeover. It involves creating unfavorable conditions for the acquiring company by issuing new shares of stock or implementing other measures that will dilute the value of the target company's shares. This strategy can make the acquisition more expensive and less attractive to the acquiring company, therefore deterring the takeover attempt.

Question 13

One of the changes to enhance the effectiveness of the board of directors is the creation of a "lead director" role that has strong powers with regard to the board agenda and oversight of nonmanagement board member activities.

Accepted Answer

The statement is true. The creation of a lead director role with strong powers is a common practice to enhance the effectiveness of the board of directors. The lead director is typically responsible for setting the board agenda and overseeing the activities of non-management board members.

Question 14

Because top management decisions are usually complex and nonroutine,determining the quality of executive performance is beyond the power of boards of directors.

Accepted Answer

Boards of directors are responsible for overseeing executive performance and have the authority and mechanisms to evaluate the quality of top management decisions, despite their complexity.

Question 15

Well-designed stock option-based compensation plans should have the option strike prices substantially lower than the current stock prices.

Accepted Answer

Well-designed stock option-based compensation plans typically have the option strike prices set at or above the current stock prices in order to provide an incentive for employees to work towards increasing the company's stock price.

Question 16

An advantage of severance packages is that they may encourage top-level managers to accept takeover bids that are attractive to shareholders.

Accepted Answer

This is because top-level managers who know they will receive a severance package if a takeover bid is accepted may be more willing to consider the bid, as they will still have financial security even if they lose their job. This can benefit shareholders who want to maximize their returns through acquisition or merger deals.

Question 17

Awareness by top managers of the existence of external investors in the form of individuals (e.g.,Carl Icahn)and groups (e.g.,hedge funds)often positively influences them to align their interests with shareholders.

Accepted Answer

When top managers are aware of the presence of external investors, they are more likely to prioritize shareholder interests in order to maintain their support and avoid potential conflicts or pressure.

Question 18

Long-term incentives facilitates the firm's efforts through the board of directors' pay-related decisions to avoid potential agency problems by linking managerial compensation to the wealth of common shareholders.

Accepted Answer

Long-term incentives align the interests of managers and shareholders by linking compensation to long-term company performance. By doing so, it reduces the potential for agency problems between managers and shareholders, which occur when managers pursue their own interests instead of maximizing shareholder value. The board of directors plays a crucial role in making pay-related decisions for executives, and by including long-term incentives, it can ensure that managers are focused on long-term growth and shareholder value creation.

Question 19

The increased use of the market for corporate control has decreased the sophistication and variety of managerial defense tactics that are used in takeovers.

Accepted Answer

The answer of The increased use of the market for...

Question 20

As globalization grows,adequate corporate governance is becoming an important requirement for doing business with a foreign firms and in foreign countries.

Accepted Answer

As companies expand internationally and engage in cross-border transactions, the need for good corporate governance practices becomes increasingly important to ensure transparency, accountability, and sustainable growth.

Quiz 10: Corporate Governance.