投资学题库Chap001 (9)

24. The ____________ refers to the potential conflict between management and shareholders.

A. agency problem

B. diversification problem

C. liquidity problem

D. solvency problem

E. regulatory problem

The agency problem describes potential conflict between management and shareholders. The other problems are those of firm management only.

AACSB: Analytic Blooms: Remember

Difficulty: Basic

Topic: Financial Management

1-36

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McGraw-Hill Education.

25. A disadvantage of using stock options to compensate managers is that

A. it encourages managers to undertake projects that will increase stock price.

B. it encourages managers to engage in empire building.

C. it can create an incentive for managers to manipulate information to prop up a stock

price temporarily, giving them a chance to cash out before the price returns to a level reflective of the firm's true prospects.

D. All of the options

Encouraging managers to undertake projects that will increase stock price is a desired characteristic. Encouraging managers to engage in empire building is not necessarily a good or bad thing in and of itself. Creating an incentive for managers to manipulate information to prop up a stock price temporarily creates an agency problem.

AACSB: Analytic Blooms: Understand

Difficulty: Basic

Topic: Financial Management

1-37

Copyright ? 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

26. Which of the following are mechanisms that have evolved to mitigate potential agency problems?

I) Using the firm's stock options for compensation II) Hiring bickering family members as corporate spies

III) Boards of directors forcing out underperforming management IV) Security analysts monitoring the firm closely V) Takeover threats

A. II and V

B. I, III, and IV

C. I, III, IV, and V

D. III, IV, and V

E. I, III, and V

All the options except hiring bickering family members as corporate spies have been used to try to limit agency problems.

AACSB: Analytic Blooms: Understand Difficulty: Intermediate

Topic: Financial Management

1-38

Copyright ? 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

27. Corporate shareholders are best protected from incompetent management decisions by

A. the ability to engage in proxy fights.

B. management's control of pecuniary rewards.

C. the ability to call shareholder meetings.

D. the threat of takeover by other firms.

E. one-share/one-vote election rules.

Proxy fights are expensive and seldom successful, and management may often control the board or own significant shares. It is the threat of takeover of underperforming firms that has the strongest ability to keep management on their toes.

AACSB: Analytic Blooms: Understand Difficulty: Intermediate

Topic: Financial Management

28. Theoretically, takeovers should result in

A. improved management.

B. increased stock price.

C. increased benefits to existing management of taken-over firm.

D. improved management and increased stock price.

E. All of the options

Theoretically, when firms are taken over, better managers come in and thus increase the price of the stock; existing management often must either leave the firm, be demoted, or suffer a loss of existing benefits.

AACSB: Analytic Blooms: Remember

1-39

Copyright ? 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

Difficulty: Basic

Topic: Financial Management

29. During the period between 2000 and 2002, a large number of scandals were uncovered. Most of these scandals were related to

I) manipulation of financial data to misrepresent the actual condition of the firm. II) misleading and overly optimistic research reports produced by analysts. III) allocating IPOs to executives as a quid pro quo for personal favors. IV) greenmail.

A. II, III, and IV

B. I, II, and IV

C. II and IV

D. I, III, and IV

E. I, II, and III

I, II, and III are all mentioned as causes of recent scandals.

AACSB: Analytic Blooms: Understand Difficulty: Intermediate

Topic: Financial Management

1-40

Copyright ? 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

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