Deck 16: Financial System Design

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.

Answer 1

A

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

Answer 2

B

Question 3

Japan and Germany are two major __________-oriented systems.

A) securities
B) equities
C) banking
D) markets

Answer 3

C

Question 4

Germany and __________ are two major banking-oriented systems.

A) the United Kingdom
B) Japan
C) France
D) the United States

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.

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

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

Question 8

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

A) Germany
B) Japan
C) France
D) the United Kingdom

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.

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

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

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.

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

Question 14

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

A) securities
B) equities
C) banking
D) markets

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

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

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

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

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

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

Question 21

Of the two conflicts, __________ more severe as the firm becomes smaller.

A) the shareholder-lender conflict gets
B) the manager-shareholder conflict gets
C) both get
D) neither gets

Question 22

The stockholder-manager conflict in a large publicly held firm is manifested in all of the following ways except

A) the managers implement very low-risk strategies that have very low returns.
B) the managers implement strategies that maximize the value of the firm.
C) managers pursue strategies that maximize firm size rather than the value of the firm.
D) the managers attempt to maximize their salaries.

Question 23

In Germany the three largest banks or Grossbanken are

A) commercial banks.
B) savings banks.
C) cooperative banks.
D) specialized banks.

Question 24

The risk-shifting problem tends to be __________ for __________ firms than for __________ firms.

A) greater; small; large
B) greater; large; small
C) the same; large; small
D) None of the above.

Question 25

The "corporate takeover market" plays a part in handling the conflict between management and __________ in __________-oriented financial systems.

A) bankers; markets
B) bankers; banking
C) stockholders; markets
D) stockholders; banking

Question 26

Conflict resolution of the stockholder-lender conflict in smaller market-oriented firms is most effectively accomplished by

A) financial intermediation (monitoring).
B) financial intermediation (ownership consolidation).
C) rating agencies.
D) managerial compensation.

Question 27

In Germany, banks __________ shares in the large firms they lend to, which __________ lender-stockholder conflict.

A) are not allowed to own; is their way of minimizing
B) are not allowed to own; gives rise to
C) own a considerable bloc of; is their way of minimizing
D) own a considerable bloc of; gives rise to

Question 28

Conflict resolution of the stockholder-lender conflict in larger banking-oriented firms is most effectively accomplished by

A) financial intermediation (monitoring).
B) financial intermediation (ownership consolidation).
C) corporate governance.
D) None of the above.

Question 29

In banking-oriented systems, handling of the manager-stockholder conflict in large firms is through

A) rating agencies.
B) the potential for takeovers.
C) management ownership of the firm.
D) bank ownership of the firm.

Question 30

Small firms borrow from "monitoring-intensive" financial intermediaries in __________ financial systems.

A) banking-oriented
B) markets-oriented
C) banking- and markets-oriented
D) socialist

Question 31

German banks are able to control a significant number of German firms by

A) making large syndicated loans.
B) ownership of shares alone.
C) ownership of shares and having proxy voting power over the shares in their custody.
D) sheer size in the lending market.

Question 32

The dominance of banks in Germany comes at the expense of __________ markets there.

A) securities
B) government bond
C) consumer borrowing
D) foreign exchange

Question 33

Bond rating agencies are important in the channeling of funds to __________ firms in __________-oriented systems.

A) small; banking
B) small; markets
C) large; banking
D) large; markets

Question 34

Conflict resolution of the manager-stockholder conflict in larger market-oriented firms is most effectively accomplished by

A) financial intermediation (monitoring).
B) financial intermediation (ownership consolidation).
C) rating agencies.
D) managerial compensation.

Question 35

The two types of financial systems tend to treat

A) small firms alike.
B) large firms alike.
C) both small and large firms alike.
D) neither small nor large firms alike.

Question 36

In markets-oriented systems an under-performing "entrenched" management is often replaced by

A) SEC regulators.
B) a hostile takeover.
C) stockholders electing a new board of directors to fire the managers.
D) the bank that owns the firm firing them.

Question 37

In markets-oriented systems, handling of the manager-stockholder conflict in large firms is through

A) rating agencies.
B) the potential for takeovers.
C) management ownership of the firm.
D) bank ownership of the firm.

Question 38

__________ firms are treated similarly in financial systems around the world in the handling of their __________ conflict.

A) Small; stockholder-lender
B) Small; manager-stockholder
C) Large; stockholder-lender
D) Large; manager-stockholder

Question 39

Stock options for corporate managers plays a part in handling the conflict between management and __________ in __________-oriented financial systems.

A) bankers; markets
B) bankers; banking
C) stockholders; markets
D) stockholders; banking

Question 40

The __________ "Hausbank" handles all the external financing for a firm.

A) Japanese
B) German
C) Swedish
D) British

Question 41

As of the end of 1994, which of the countries in our survey had the largest proportion of stock held by individuals?

A) The United Kingdom
B) The United States
C) Japan
D) Germany

Question 42

Commercial bank ownership of corporate stock is prohibited by regulators in

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

Question 43

As of the end of 1994 the country in our survey with the smallest stock market in dollar terms was

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

Question 44

The financial systems of __________ have major firms working all their external financing through a single bank.

A) Japan and the United Kingdom
B) the United States and the United Kingdom
C) Germany and the United Kingdom
D) Japan and Germany

Question 45

Unlike Germany, Japan has

A) a suppressed corporate debt market.
B) laws against banks holding corporate stock.
C) a large stock market.
D) close ties between a firm and a single bank.

Question 46

The country in which two of the categories of banks are clearing banks and merchant banks is

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

Question 47

The German bond market

A) is very large by international standards.
B) is very small by international standards.
C) is about the same size as the U.S. bond market.
D) shrunk considerably in the 1990s.

Question 48

Firm ownership in the United Kingdom is largest for

A) individuals.
B) financial institutions ? agents.
C) financial institutions ? ownership/control.
D) nonfinancial corporations.

Question 49

Because of a regulatory environment that encourages foreign participation and competition in financial services, the domestic markets in the __________ are not really distinct from the foreign markets.

A) the United Kingdom
B) the United States
C) Japan
D) Germany

Question 50

As of the end of 1994 which of the countries in our survey had the smallest proportion of stock held by foreigners?

A) The United Kingdom
B) The United States
C) Japan
D) Germany

Question 51

The country in which banks are classified as city banks, regional banks, and special purpose financial institutions is

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

Question 52

Bank ownership of corporate stock is "discouraged" by regulators in

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

Question 53

As of the end of 1994, which of the countries in our survey had the closest match in size between its stock and banking markets?

A) The United Kingdom
B) The United States
C) Japan
D) Germany

Question 54

In 2002, __________ had the largest dollar value of mergers and acquisitions.

A) the United States
B) the United Kingdom
C) Germany
D) Japan

Question 55

"Financial distress" is more easily handled in a __________-oriented financial system, in which ownership of the firm tends to be spread among __________ shareholders than in the other type of system.

A) markets; more
B) markets; fewer
C) banking; more
D) banking; fewer

Question 56

As of the end of 1994 which of the countries in our survey had the largest proportion of stock held by the government?

A) The United Kingdom
B) The United States
C) Japan
D) Germany

Question 57

It is not surprising to see a rather __________ volume of mergers and acquisitions in Germany given how its __________ conflicts are resolved.

A) high; shareholder-lender
B) high; manager-stockholder
C) low; shareholder-lender
D) low; manager-stockholder

Question 58

Which of the following banks is similar to a U.S. investment bank?

A) City banks
B) Grossbanken
C) Merchant banks
D) Cooperative banks

Question 59

The country in which a form of industrial organization in which a group of companies own stock in each other and has a bank that owns stock in each firm is

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

Question 60

The two nations that have gone furthest with "universal banking" are

A) the United States and the United Kingdom.
B) the United Kingdom and Germany.
C) Germany and Japan.
D) the United States and Japan.

Question 61

It is not surprising to see a rather __________ volume of mergers and acquisitions in the United States given its __________-oriented financial system.

A) high; banking
B) high; markets
C) low; banking
D) low; markets

Question 62

Stocks and bonds issued in banking-oriented systems are rather __________ because they are traded __________.

A) liquid; frequently
B) liquid; infrequently if at all
C) illiquid; frequently
D) illiquid; infrequently if at all

Question 63

Newly-privatized firms in Eastern Europe require __________ investor monitoring, which suggests the relative desirability of a __________-oriented financial system.

A) heavy; banking
B) heavy; markets
C) little or no; banking
D) little or no; markets

Question 64

Stocks and bonds issued in markets-oriented financial systems are rather __________ because they are traded __________.

A) liquid; frequently
B) liquid; infrequently if at all
C) illiquid; frequently
D) illiquid; infrequently if at all

Question 65

Banks are better at solving the stockholder-lender conflict than rating agencies when they

A) are allowed to hold a substantial ownership stake in the borrowing firm.
B) steer clear of holding any ownership stake in the borrowing firm.
C) operate in markets-oriented financial systems.
D) issue individually-approved loans rather than lines of credit.

Question 66

Germany and Japan pay a higher price for raising capital because of

A) having rather illiquid securities markets.
B) unresolved stockholder-lender and manager-stockholder conflicts.
C) allowing banks to hold substantial ownership shares in large firms.
D) shutting large firms out of those securities markets.

Question 67

The price the United States and the United Kingdom pay for having rather liquid securities markets is

A) fluctuations in securities prices.
B) unresolved stockholder-lender and manager-stockholder conflicts.
C) allowing banks to hold substantial ownership shares in large firms.
D) shutting large firms out of those securities markets.

Question 68

Eastern Europe is an information-__________ environment, which __________ the use of securities markets for large-firm financing.

A) poor; encourages
B) poor; discourages
C) rich; encourages
D) rich; discourages

Question 69

It is not surprising to see a rather __________ volume of mergers and acquisitions in Japan given its __________-oriented financial system.

A) high; banking
B) high; markets
C) low; banking
D) low; markets