Question 1

Due to criticisms of rating agencies following the default of many subprime products, the SEC prohibited credit rating agencies from structuring the same products that they rate.

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Question 2

The Sarbanes-Oxley Act of 2002 and the Global Legal Settlement of 2002 both have the potential to reduce economies of scope.

Accepted Answer

Both the Sarbanes-Oxley Act and the Global Legal Settlement require companies to focus on increased transparency, accountability and disclosure, which can limit the ability of companies to engage in activities that fall outside of their core competencies or primary business lines, thereby reducing economies of scope.

Question 3

What issues do critics cite when discussing why Sarbanes-Oxley has led to a decline in U.S. capital markets?

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Question 4

Distinguish between adverse selection and moral hazard.

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Question 5

Evaluate the major provisions of Sarbanes-Oxley and the Global Legal Settlement as remedies for conflict of interest problems.

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Question 6

What conflicts of interest can arise in accounting firms?

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Question 7

Explain how the "lemons" problem could cause financial markets to fail.

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Question 8

Why should we be concerned about conflicts of interest in the financial services industry?

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Question 9

What facts about financial structure can be explained by moral hazard?

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Question 10

What conflicts of interest can arise in credit-rating agencies?

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Question 11

What are economies of scale in financial transactions? How can financial intermediaries achieve these economies?

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Question 12

What conflicts of interest can arise in investment banking?

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Question 13

What facts about financial structure can be explained by adverse selection?

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Question 14

What is the principal-agent problem?

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Question 15

What factors usually cause an increase in moral hazard and adverse selection?

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Question 16

The Global Legal Settlement of 2002 arose out of a lawsuit brought by New York Attorney General Eliot Spitzer against the ten largest investment banks.

Accepted Answer

This is correct. The Global Legal Settlement of 2002 did arise out of a lawsuit brought by New York Attorney General Eliot Spitzer against the ten largest investment banks.

Question 17

The Sarbanes-Oxley Act of 2002 established a Public Company Accounting Oversight Board (PCAOB), overseen by the SEC, to supervise accounting firms and ensure that audits are independent and controlled for quality.

Accepted Answer

This statement is true. The Sarbanes-Oxley Act of 2002 did establish a Public Company Accounting Oversight Board (PCAOB) to supervise accounting firms and ensure audit quality. The PCAOB is overseen by the SEC.

Question 18

What is the free-rider problem? Describe some situations that this problem creates.

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Question 19

The U.S. has more lawyers per capita than any other country in the world. It is also among the richest countries in the world. Explain why these two facts may not be mere coincidence.

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Quiz 7: Why Do Financial Institutions Exist

Due to criticisms of rating agencies following the default of many subprime products, the SEC prohibited credit rating agencies from structuring the same products that they rate.

The Sarbanes-Oxley Act of 2002 and the Global Legal Settlement of 2002 both have the potential to reduce economies of scope.

What issues do critics cite when discussing why Sarbanes-Oxley has led to a decline in U.S. capital markets?

Distinguish between adverse selection and moral hazard.

Evaluate the major provisions of Sarbanes-Oxley and the Global Legal Settlement as remedies for conflict of interest problems.

What conflicts of interest can arise in accounting firms?

Explain how the "lemons" problem could cause financial markets to fail.

Why should we be concerned about conflicts of interest in the financial services industry?

What facts about financial structure can be explained by moral hazard?

What conflicts of interest can arise in credit-rating agencies?

What are economies of scale in financial transactions? How can financial intermediaries achieve these economies?

What conflicts of interest can arise in investment banking?

What facts about financial structure can be explained by adverse selection?

What is the principal-agent problem?

What factors usually cause an increase in moral hazard and adverse selection?

The Global Legal Settlement of 2002 arose out of a lawsuit brought by New York Attorney General Eliot Spitzer against the ten largest investment banks.

The Sarbanes-Oxley Act of 2002 established a Public Company Accounting Oversight Board (PCAOB), overseen by the SEC, to supervise accounting firms and ensure that audits are independent and controlled for quality.

What is the free-rider problem? Describe some situations that this problem creates.

The U.S. has more lawyers per capita than any other country in the world. It is also among the richest countries in the world. Explain why these two facts may not be mere coincidence.