Deck 5: The Roles of Government, Securities Markets, Financial Institutions, Ownership Structure, Board Oversight, and Contract Devices

Question 1

Financial institutions (such as commercial banks and finance companies) play an important role in mitigating information asymmetry problems in financial markets because:

A)they require a potential borrower to disclose confidential information about their project to the public before they are approved for a loan.
B)they regularly receive private information from the firm about the quality of the firm's projects, and yet will keep such information confidential.
C)they lend only to firms that do not suffer from information asymmetry problems.

Answer 1

they regularly receive private information from the firm about the quality of the firm's projects, and yet will keep such information confidential.

Question 2

To mitigate deadweight costs associated with the shareholder-management principal-agent conflict, some investors become major shareholders and attempt to influence management to act in the best interest of shareholders.This is an example of:

A)a takeover.
B)shareholder activism.
C)packing the board.
D)principal intervention.

Answer 2

shareholder activism.

Question 3

Discuss an example each of a contract that could be used to mitigate principal-agent conflicts between:

Answer 3

(a) shareholders and management; and
(b) shareholders and bondholders.

Question 4

Under the Securities Exchange Act of 1934, Congress created the Securities and Exchange Commission (the 'SEC').The SEC's mission is to administer federal securities laws and issue rules and regulations to provide protection for investors and to ensure that the securities markets are fair and honest.This is accomplished primarily by:

A)creating a national system of securities brokers and dealers.
B)requiring public firms to disclose accurate and timely information to the investing public.
C)creating a system of arbitration boards to provide judgments on investors' complaints.
D)regulating the trading procedures in U.S.securities markets.

Question 5

Means by which the securities markets serve to mitigate principal-agent or information asymmetry problems include all of the following EXCEPT:

A)Management realizes that its reputation with investors is valuable, and can be sustained only if accurate information is provided on a timely basis.
B)Various market mechanisms exist to discipline a firm's management, and thus to mitigate conflicts of interest between management and shareholders.One of the most powerful is the threat of a hostile takeover of the firm, after which management is fired.
C)Exchanges such as the NYSE regularly publish lists of firms that appear to be overvalued because their management is poor.