Question 1

Two important issues in corporate governance are (1)the rules that cover the board's ability to fire the CEO and (2)the rules that cover the CEO's ability to remove members of the board.

Accepted Answer

False

Question 2

Which of the following is NOT normally regarded as being a good reason to establish an ESOP?

Accepted Answer

Statement b is the correct answer, because firms can easily grant stock options to employees without an ESOP.

Question 3

The CEO of D'Amico Motors has been granted some stock options that have provisions similar to most other executive stock options.If D'Amico's stock underperforms the market, these options will necessarily be worthless.

Accepted Answer

Stock options granted to executives, including those at D'Amico Motors, typically have a set exercise price. If the company's stock underperforms the market but remains above the exercise price, the options can still hold value, allowing the executive to buy stock at below-market prices.

Question 4

ESOPs were originally designed to help improve worker productivity, but today they are also used to help prevent hostile takeovers.

Accepted Answer

ESOPs (Employee Stock Ownership Plans) were initially created as a way to motivate employees and increase productivity by granting them ownership in the company through stock options. However, over time ESOPs have also been used as a defense mechanism against hostile takeovers by giving employees a controlling stake in the company.

Question 5

A poison pill is also known as a corporate restructuring.

Accepted Answer

A poison pill is a defense mechanism used by a company to discourage a hostile takeover by making the target company less attractive to the acquirer. It is not a corporate restructuring.

Question 6

Which of the following is NOT normally regarded as being a barrier to hostile takeovers?

Accepted Answer

Abnormally high executive compensation is not normally regarded as a barrier to hostile takeovers. In fact, it can sometimes be a motivator for potential acquirers looking to increase their return on investment by cutting excessive executive pay. The other options, targeted share repurchases, shareholder rights provisions, restricted voting rights, and poison pills, are all commonly used strategies to deter or prevent hostile takeovers.

Quiz 13: Agency conflicts and corporate governance