Question 1

Shareholders must rely exclusively on the board of directors to protect their interests.

Accepted Answer

Shareholders can also protect their interests through voting, activism, and filing lawsuits if necessary. However, the board of directors also plays a crucial role in protecting the shareholders' interests.

Question 2

It is illegal in the United States to offer stock trade tips to clients based on public information.

Accepted Answer

It is not illegal to offer stock trade tips to clients based on public information. However, it is illegal to engage in insider trading or to provide false or misleading information to clients.

Question 3

Institutional investors are sometimes referred to as:

Accepted Answer

Institutional investors are often referred to as Wall Street investors because they represent the interests and mechanisms of the financial markets, typically engaging in large-scale investments, unlike individual or "Main Street" investors.

Question 4

Which of the following statements is not true about shareholders?

Accepted Answer

Shareholders do not necessarily own equal shares of company assets; their ownership proportion is based on the number of shares they hold relative to the total number of shares issued by the company.

Question 5

The two main types of investors that own shares of stock in U.S.corporations are individuals and institutions.

Accepted Answer

Individuals and institutions are the two main types of investors that own shares of stock in U.S. corporations.

Question 6

It is the responsibility of the board of directors and its audit committee to engage an independent accounting firm to audit the financial statements prepared by management.

Accepted Answer

According to generally accepted accounting principles (GAAP) and corporate governance regulations, it is the responsibility of the board of directors and its audit committee to engage an independent accounting firm to audit the financial statements prepared by management. This helps ensure the accuracy, reliability, and transparency of the financial statements.

Question 7

A corporation's shareholders have a right to inspect the company's books for any reason.

Accepted Answer

Shareholders have the right to inspect a company's books and records, but this right is typically limited to purposes related to their interest as shareholders and often requires meeting certain legal standards or procedures.

Question 8

The activism of institutional shareholders has often worsened company performance.

Accepted Answer

There is no clear evidence that the activism of institutional shareholders worsens company performance. In fact, some studies suggest that their activism can lead to positive changes in corporate governance and ultimately improve performance. However, there are cases where shareholder activism can be disruptive and counterproductive. Overall, the impact of institutional shareholder activism on company performance can vary depending on the specific circumstances and the actions taken by the shareholders.

Question 9

When boards of directors meet without management present,they are more likely to have completely candid discussions about a company's affairs.

Accepted Answer

When management is not present at board meetings, directors may feel more comfortable expressing concerns or discussing sensitive topics without fear of retribution from management. This can lead to more open and honest discussions about a company's affairs.

Question 10

Which of the following is not true about institutional investors?

Accepted Answer

The statement that the proportion of institutional ownership of stock in the U.S. has declined since the 1960s is not true. In fact, institutional ownership has steadily increased over time.

Question 11

In 2014,of the following nations,the fastest growing stock market was in:

Accepted Answer

In 2014, India had the fastest growing stock market with the Bombay Stock Exchange (BSE) Sensex index rising over 30% due to renewed investor confidence in the new government's economic reforms and policies. The United States and Japan also experienced stock market growth, but at a slower pace of around 10-15%. Indonesia's stock market, on the other hand, experienced a decline in 2014.

Question 12

The ratio of average executive to average worker pay tends to increase during recessions and fall during periods of economic expansion.

Accepted Answer

The ratio of average executive to average worker pay tends to increase during periods of economic expansion and fall during recessions. This is because during economic expansions, companies tend to have more profits and can afford to pay their executives higher salaries, whereas during recessions, companies may need to cut costs and therefore may reduce executive salaries while maintaining worker salaries.

Question 13

Stock options represent the right to buy a company's stock at a set price for a certain period.

Accepted Answer

This is a correct definition of stock options.

Question 14

Institutional investors have little incentive to hold their shares and organize to change management policy.

Accepted Answer

Institutional investors, such as pension funds and mutual funds, have a significant stake in the company and can exert their influence to change management policies if they believe it is necessary in order to increase the company's value. This can be done through shareholder voting and activism. Additionally, these investors often hold their shares for a longer period of time in order to see a return on their investment, unlike individual investors who may be more likely to sell their shares quickly. Therefore, institutional investors have a strong incentive to hold their shares and push for changes if they believe it will benefit the company and their investment.

Question 15

Investors may receive an economic benefit from the ownership of stock by receiving:

Accepted Answer

Stockholders may receive economic benefits in the form of dividends and capital gains. Dividends are payments made by a company to its shareholders, usually on a regular basis, and represent a portion of the company's profits. Capital gains, on the other hand, are profits earned from the sale of a stock at a price higher than its purchase price. Interest is not typically earned from owning stock, as stocks are considered equity investments rather than debt investments.

Question 16

The Organization for Economic Cooperation and Development (OECD),representing 34 nations,issued a revised set of principles of corporate governance to serve as a benchmark for companies and policymakers worldwide.

Accepted Answer

The statement is true. The OECD did indeed issue a revised set of principles of corporate governance to serve as a benchmark for companies and policymakers worldwide, representing 34 nations.

Question 17

Investors always choose to invest in the stock of companies that pay high dividends.

Accepted Answer

While some investors may prefer to invest in companies that pay high dividends, others may prioritize other factors such as growth potential or value. Additionally, some investors may choose to reinvest their dividends rather than receive them as income.

Question 18

Shareholders have become an increasingly powerful and vocal stakeholder group in corporations.

Accepted Answer

Shareholders have gained more influence in recent years as they demand greater transparency and accountability from corporations. They can vote on company decisions and proposals, and their interests are often reflected in the actions of executives and the board of directors.

Question 19

Since the 1960s,growth in the numbers of institutional investors in the United States has been phenomenal.

Accepted Answer

The statement is true. The growth of institutional investors in the US since the 1960s has been significant.

Question 20

Boards of directors in the United States are required to staff their compensation committees exclusively with outside directors.

Accepted Answer

According to the Securities and Exchange Commission (SEC) rules, at least two-thirds of compensation committees of publicly traded companies must consist of independent directors who are not officers or employees of the company. Therefore, the compensation committee can include a mix of inside and outside directors, but the majority must be outside directors.

Quiz 13: Shareholder Rights and Corporate Governance