Deck 21: Corporate Governance Around the World

Question 1

English common law countries tend to provide a stronger protection of shareholder rights than French civil law countries because:

A) the former countries tend to be more democratic than the latter.
B) the former countries tend to protect property rights better than the latter.
C) the former countries tend to have more separation of power than the latter.
D) All of these.

Answer 1

B

Question 2

There would be agency problems if?

A) Complete contracts could be written.
B) If managers and shareholders would know all future contingencies.
C) Complete contracts cannot be written.
D) In the absence of conflicts of interest.

Answer 2

C

Question 3

Suppose Mr.Lee and his relatives hold 30% of shares outstanding of Samsung Life,which in turn holds 20% of Samsung Electronics.What is the cash flow right of the Lee family in Samsung Electronics?

A) 50%.
B) 10%.
C) 20%.
D) 6%.

Answer 3

D
Explanation: (0.30)*(0.20) = 0.06 or 6%.

Question 4

Corporate governance can be defined as:

A) the government-imposed rules and regulations affecting corporate management.
B) the general framework in which company management is selected and monitored.
C) the rules and regulations adopted by boards of directors specifying how to manage companies.
D) the economic, legal, and institutional framework in which corporate control and cash flow rights are distributed among shareholders, managers and other stakeholders of the company.

Question 5

Free cash flows refer to:

A) a firm's cash reserve in excess of tax obligation.
B) a firm's funds in excess of what's needed for undertaking all profitable projects.
C) a firm's cash reserve in excess of interest and tax payments.
D) a firm's income tax refund that is due to interest payments on borrowing.

Question 6

Managers may inappropriately use the residual control rights:

A) to pay themselves exorbitant perquisites.
B) not to divert assets through transfer pricing.
C) to take on unprofitable projects.
D) to invest in positive NPV projects.

Question 7

Sarbanes-Oxley Act of 2002 stipulates that:

A) a public accounting oversight board be created.
B) the company should appoint independent financial experts to its audit committee.
C) CEO and CFO sign off the company's financial statements.
D) All of these.

Question 8

Commercial legal systems of most countries are derived from four legal origins.Which of the following is not one of them?

A) English Common law.
B) French Common law.
C) German Common law.
D) Italian common law.

Question 9

Morck,Shleifer and Vishny (1988)find that:

A) the entrenchment effect dominates the alignment effect.
B) the alignment effect dominates the entrenchment effect.
C) the entrenchment effect dominates the alignment effect over the range of managerial ownership between 5 percent and 25 percent.
D) the alignment effect dominates the entrenchment effect over the range of managerial ownership between 5 percent and 25 percent.

Question 10

The central issue of corporate governance is:

A) how to protect creditors from managers and controlling shareholders.
B) how to protect outside investors from the controlling insiders.
C) how to alleviate the conflicts of interest between managers and shareholders.
D) how to alleviate the conflicts of interest between shareholders and bondholders.

Question 11

Which of the following statements is correct?

A) When professional managers have large equity positions of their own in a company with diffused ownership, they have both the power and a motive to engage in self-dealings.
B) When professional managers have small equity positions of their own in a company with concentrated ownership, they have both the power and a motive to engage in self-dealings.
C) When professional managers have small equity positions of their own in a company with diffused ownership, they have both the power and a motive to engage in self-dealings.
D) When professional managers have large equity positions of their own in a company with concentrated ownership, they have both the power and a motive to engage in self-dealings.

Question 12

Which of the following statements is true for a complete contract?

A) Such contracts are already fulfilled by both parties.
B) There is no agency problem for compete contract.
C) Complete contract specifies a fixed wage regardless of performance.
D) None of these.

Question 13

Agency problems may be alleviated by:

A) incentive contracts.
B) debt.
C) market for corporate control.
D) All of these.

Question 14

The main weakness of the 'public corporation' is:

A) too many shareholders, which makes it difficult to make corporate decision.
B) relatively high corporate income tax rates.
C) conflicts of interest between managers and shareholders.
D) conflicts of interests between shareholders and bondholders.

Question 15

Dominant investors may acquire control through all of the following except:

A) interfirm cross-holdings.
B) intrafirm cross-holdings.
C) shares with superior voting rights.
D) pyramidal ownership structure.

Question 16

Debt may be beneficial for the following reasons except:

A) because it reduces free cash flows.
B) because of its disciplinary effect on managers.
C) because the interest payments benefit shareholders.
D) because interest has to be paid to avoid bankruptcy.

Question 17

The board of directors may grant stock options to managers in order to:

A) save executive compensation costs.
B) use as a substitute for bonus.
C) align the interest of managers with that of shareholders.
D) None of these.

Question 18

Concentrated corporate ownership is most prevalent in:

A) Japan.
B) the United Kingdom.
C) the United States.
D) Australia.

Question 19

Private benefits of corporate control will tend to be higher in:

A) in French civil law countries than in English common law countries.
B) in English common law countries than in French civil law countries.
C) in French civil law countries than in Scandinavian civil law countries.
D) In English common law countries than in German civil law countries.

Question 20

Which of the following is not used to mitigate the agency problem?

A) Debt.
B) Incentive contracts.
C) Overseas share listings.
D) All of these mechanisms are used to mitigate the agency problem.

Question 21

Corporate governance reform requires all of the following except:

A) increasing the decision making power of managers.
B) strengthening the independence of boards of directors with more outsiders.
C) enhancing the transparency and disclosure standard of financial statements.
D) energizing the regulatory and monitoring functions of securities commissions.

Question 22

Discuss the major advantage and key weakness of a public corporation.

Question 23

How are investors protected under English common law?
What are the implications?

Question 24

Explain the agency problem and how it can be remedied.

Question 25

Private benefits of corporate control:

A) are cash flows from owning equity.
B) are equally shared by all investors.
C) are not equally shared by all investors.
D) do not exist.

Question 26

How can listing overseas benefit the corporate governance of a public company?

Question 27

Discuss the concept of "private benefits of corporate control".

Question 28

Weak investor protection is associated with all of the following except:

A) valuable stock markets.
B) sharp market declines during a financial crisis.
C) lower stock market capitalization.
D) fewer publicly traded companies.