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In principal-agent relationships, _____ describes the difficulty of principals to ascertain whether agents have really put forth their best efforts.


A) the agency problem
B) adverse selection
C) on-the-job consumption
D) moral hazard

E) None of the above
F) A) and B)

Correct Answer

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Why do shareholders of public companies need to appoint a board of directors to represent their interests?


A) Because of the separation of ownership and control
B) Because employees of a company cannot be shareholders
C) Because the board of directors itself is made up of shareholders
D) Because they want tighter control over day-to-day operations of a company

E) None of the above
F) B) and C)

Correct Answer

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According to the perspective of shareholder capitalism, _____.


A) shareholders in public stock companies are restricted from buying shares of two competing companies
B) shareholders in public stock companies have the most legitimate claim on profits
C) shareholders in public stock companies have significant decision-making power
D) shareholders in public stock companies have unlimited financial liability

E) None of the above
F) All of the above

Correct Answer

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Which of the following facts proves that GE's board is fairly diverse compared to other Fortune 500 companies?


A) GE's board is composed of 94 percent outside directors, compared to less than 70 percent for the others.
B) GE's board is chaired by its CEO while other companies have outside directors.
C) GE's board is composed of 28 percent women, compared to less than 16 percent for the others.
D) GE's board has five committees, each with its own chair, compared with less than three for the others.

E) All of the above
F) C) and D)

Correct Answer

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Postrupe Inc., a publicly traded company, has ten members on its board.Of the ten members, six members are employees of the company and includes the CEO, who also chairs the board.The board has been failing in its responsibilities toward the shareholders who now want a new board.Assuming that the total number of board members remains constant, how many outside directors should the shareholders appoint to Postrupe's board to achieve board independence?


A) 1
B) 3
C) 5
D) 7

E) A) and B)
F) B) and C)

Correct Answer

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Which of the following do NOT serve as additional external-governance mechanisms?


A) Auditors
B) Government regulators
C) Board of directors
D) Industry analysts

E) A) and B)
F) None of the above

Correct Answer

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Travis, the CEO of Riplon Corp., used company funds to buy a car worth $1 million and a house for $6 million in Santa Fe.This is an example of _____.


A) corporate governance
B) on-the-job consumption
C) adverse selection
D) shared value creation

E) All of the above
F) A) and B)

Correct Answer

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Rajat Gupta's role in providing inside information to Galleon Group for the benefit of Galleon Group's stockholders and Rajat Gupta himself is an example of _____.


A) shareholder capitalism
B) adverse selection
C) shared value creation
D) moral hazard

E) B) and D)
F) B) and C)

Correct Answer

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State two benefits that private companies enjoy over public companies.

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Private companies enjoy certain benefits...

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In publicly-traded companies, individuals who are delegated to perform duties on behalf of company owners are known as _____.


A) principals
B) shareholders
C) agents
D) clients

E) A) and B)
F) None of the above

Correct Answer

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How does the separation of ownership and control in public stock companies present a problem?

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The separation of ownership and control ...

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Which of the following is NOT true about the members of the board of directors in a public stock company?


A) They represent the shareholders' interests.
B) They may hire and fire top management.
C) They oversee the firm's operations.
D) They are not responsible to shareholders.

E) B) and D)
F) C) and D)

Correct Answer

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Outside directors are more likely to watch out for the interests of shareholders of their firm because:


A) they are more likely to benefit from using inside information to trade stocks.
B) they do not have the safety of serving on the boards of other firms.
C) they are part-time employees of the firm.
D) they have more independence than inside directors.

E) B) and C)
F) B) and D)

Correct Answer

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John Hammergren, the CEO of McKesson, received an annual compensation of $50 million.The compensation was closely tied to the performance of McKesson's stock, which appreciated considerably during his tenure.This situation best exemplifies _____.


A) the strong relationship between executive compensation and company performance
B) the public's perception of a company's stock value based on executive compensation figures
C) the avoidance of control mechanisms to guide performance
D) the inversely proportional relationship between CEO compensation and the pay of the average employee

E) B) and D)
F) B) and C)

Correct Answer

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Describe the role of outside directors as part of a company's board of directors.

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Outside directors, unlike inside directo...

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What are the three major incidents that violated the core values of HP and subsequently led to a drastic fall in its market value?

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The first incident was the leaking of co...

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Johan is a recent graduate who states that he has interned at a major accounting firm so that his value as a candidate for employment increases.A startup recruits Johan based on his stated credentials without verifying them.Two days into the job, Johan's team lead realizes that Johan does not know much of what he claimed to know during the interview.This scenario best exemplifies _____.


A) moral hazard
B) adverse selection
C) shared value creation
D) corporate governance

E) A) and D)
F) None of the above

Correct Answer

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According to the agency theory, _____.


A) conflicts that arise in corporations should be addressed in the legal realm
B) corporations are more than a set of contracts between parties
C) companies should focus on generating profits for stockholders
D) principals and agents have interchangeable roles

E) B) and C)
F) A) and B)

Correct Answer

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Describe moral hazard in the context of the principal-agent relationship.Use an example.

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In the principal-agent relationship, mor...

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Which of the following could most likely have prevented the accounting scandals of the early 2000s and the global financial crisis?


A) Adopting a narrow shareholder perspective
B) Separating economic interests and social needs
C) Practicing effective corporate governance
D) Adopting the principles of shareholder capitalism

E) All of the above
F) A) and C)

Correct Answer

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