BUS284 MCQ

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1. 1) For moral hazard to exist, there needs to be ... B) asymmetry of

information..
A) symmetry of information.
B) asymmetry of information.
C) the possibility of complete contracts.
D) None of the above.

2. 2) Related-party transactions may consist of ... B) tunnelling and

transfer pricing.
A) managers becoming entrenched.
B) tunnelling and transfer pricing.
C) transactions between shareholders of the same
political persuasion.
D) None of the above.

3. 3) The agency problem of debt consists of the follow- C) the sharehold-

ing: ers expropriating
the debtholders.
A) the debtholders forcing the managers to expropri-
ate the shareholders.
B) banks using proxy votes.
C) the shareholders expropriating the debtholders.
D) the large debtholder expropriating the minority
debtholders.

4. 4) Which of the following are examples of agency D) All of the above

problems? apply.

A) Empire building
B) Investing the firm's funds in projects with a nega-
tive net present value.
C) Managers' on-the-job consumption of shareholder
funds.
D) All of the above apply.

5. 5) The following statement about the residual loss is B) The residual

correct. loss consists of
the loss in firm val-
A) There is a residual loss if the monitoring costs ue caused by the
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exceed the bonding costs. agent not running
B) The residual loss consists of the loss in firm value the firm in the in-
caused by the agent not running the firm in the inter- terest of the princi-
est of the principal and which cannot be prevented by pal and which can-
monitoring and bonding. not be prevented
C) The residual loss is the difference between the by monitoring and
monitoring costs and the bonding costs. bonding.
D) None of the above.

6. 6) The main corporate governance problem outside C) the expropria-

the UK and the USA is ... tion of the minori-
ty shareholders by
A) the principal-agent problem. the large, control-
B) excessive dividends. ling shareholder.
C) the expropriation of the minority shareholders by
the large, controlling shareholder.
D) hostile takeovers.

7. 7) Which one of the following is a benefit of the mutual A) The avoidance

organisational form? of conflicts of in-
terests between
A) The avoidance of conflicts of interests between owners and cus-
owners and customers. tomers.
B) The reduced cost of capital.
C) The higher threat of a hostile takeover and the
resulting higher pressure on the managers to perform
well.
D) None of the above.

8. 8) Which one of the following statements about evi- C) The ini-

dence from research on German and UK initial public tial shareholders
offerings (IPOs) is true? of German IPOs
manage to keep
A) UK IPOs end up with fewer new large shareholders majority control
six years after the IPO. longer than the ini-
B) There is a rapid separation of ownership and con- tial shareholders
trol in the German IPOs. of UK IPOs.
C) The initial shareholders of German IPOs manage
to keep majority control longer than the initial share-

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holders of UK IPOs.
D) None of the above.

9. 9) Which one of the following statements is correct? A) German banks

assume a much
A) German banks assume a much more important more important
role as providers of finance and management support role as providers
in small- and medium-sized enterprises than in other of finance and
countries. management sup-
B) Banks never assumed an important role in the port in small- and
German corporate governance system. medium-sized en-
C) Germany is not a bank-based system. This is just terprises than in
a myth. other countries.
D) The German corporate governance system is not
any different from the UK or US system in terms of
the role of banks.

10. 10) Which one of the following statements about the A) Employees
theory of property rights is true? should be given
A) Employees should be given ownership of the firm, ownership of the
if their investments in their human capital are highly firm, if their in-
specific to the firm. vestments in their
B) Firms should not be in the form of partnerships human capital are
unless they operate in the financial sector. highly specific to
C) Property rights should always confer more cash the firm.
flow rights than control rights.
D) None of the above.

11. 11) Which one of the following statements correctly A) The demutuali-
defines demutualisation? sation consists of
a mutual building
A) The demutualisation consists of a mutual building society converting
society converting into a stock corporation and float- into a stock corpo-
ing on the stock exchange. ration and floating
B) This concerns the change in control from the sit- on the stock ex-
uation where the firm is mutually controlled by many change.
small shareholders to the situation where the firm is
controlled by a large shareholder.

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C) Both of the above are correct.
D) None of the above.

12. 12) The 'quiet life' hypothesis consists of ... B) Managers

avoiding cognitive-
A) Employees taking too many holidays. ly difficult activi-
B) Managers avoiding cognitively difficult activities. ties.
C) Shareholders retiring from their day jobs to live off
the revenues from their investments.
D) None of the above.

13. 13) Compared to UK firms, German firms ... D) Both B and C

are correct.
A) experience a much more rapid separation between
ownership and control after going public.
B) experience no or at least a much less rapid sep-
aration between ownership and control after going
public.
C) are on average older when they go public.
D) Both B and C are correct.

14. 14) Which one of the following statements is correct? D) All of the above
are correct.
A) Surprisingly, control by banks is relatively low in
continental Europe.
B) Apart from the UK and the Netherlands, institution-
al investors are relatively unimportant.
C) The most important type of large shareholder
across continental Europe is holding companies and
industrial companies.
D) All of the above are correct.

15. 15) Which one of the following statements is correct? A) Institutional in-
vestors, followed
A) Institutional investors, followed by managers, are by managers, are
the most important types of shareholders in the UK. the most im-
B) Managers are the most important type of share- portant types of
holder in the UK. shareholders in
C) Institutional investors are the second most impor- the UK.

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tant type of shareholder in the UK.
D) None of the above are correct.

16. 16) Which one of the following statements is correct? A) The concentra-
tion of control in
A) The concentration of control in UK firms is low, but UK firms is low,
still higher than in US firms. but still higher than
B) Most of stock-market listed firms in the USA have in US firms.
a shareholder with a blocking minority, but no share-
holder with a majority of the votes.
C) The concentration of control in the Netherlands is
comparable to that in UK and US firms.
D) None of the above.

17. 17) Which one of the following statements is correct? D) Both B and C
are correct.
A) Families are the most important type of large
shareholder across all of Europe.
B) Institutional shareholders are the main type of
shareholder in the UK.
C) Institutional shareholders are the main type of
shareholder in the Netherlands.
D) Both B and C are correct.

18. 18) Which one of the following statements is correct? D) All of the above.

A) The concentration of control in Japan is low com-

pared to other Asian countries.
B) Zaibatsus are typically the pre-WWII form of most
keiretsus.
C) A keiretsu is a group of industrial companies with
ties to a single bank which acts as the principal lender
to the group companies.
D) All of the above.

19. 19) Which one of the following statements is correct? B) Corporate con-
trol in Eastern
A) Corporate control in Eastern Europe is slightly Europe is slight-
lower than in Western Europe. ly lower than in
B) Corporate control in Eastern Europe is slightly Western Europe
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lower than in Western Europe and the second largest and the second
shareholder is much more important. largest sharehold-
C) Corporate control in the transitional economies er is much more
of Eastern Europe is as concentrated as in Western important.
Europe.
D) None of the above.

20. 20) Internal capital markets, i.e. capital markets within C) The business
so called business groups, tend to be efficient, if ... groups are in the
form of ownership
A) The business groups are in the form of horizontal pyramids.
structures.
B) The business groups are characterised by
cross-shareholdings.
C) The business groups are in the form of ownership
pyramids.
D) None of the above.

21. 21) In the former Communist countries of Eastern Eu- D) Both B) and C).
rope, the most prevalent types of large shareholders
are...

A) Foreign shareholders.
B) Individuals.
C) The government.
D) Both B) and C).

22. 22) ACME Inc. has dual-class shares. Class A shares B) 40%
have one vote each. Class B shares do not carry
any votes. Class A shares make out 50% of the
total equity. ACME Inc.'s main shareholder is the
Saint-John Smythe family which owns 80% of Class
A shares. What is the percentage of ownership of the
Saint-John Smythe family?

A) 0%
B) 40%
C) 50%
D) 80%

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23. 23) Ownership pyramids are ... B) a way of in-
creasing the risk
A) a way of achieving weak control with concentrated of minority share-
ownership. holder expropria-
B) a way of increasing the risk of minority sharehold- tion.
er expropriation.
C) some of the most visited tourist sites in the world.
D) None of the above.

24. 24) Private benefits of control are... B) the benefits to

the large share-
A) higher in common law countries than in civil law holder from con-
countries. trolling a firm and
B) the benefits to the large shareholder from control- are not shared
ling a firm and are not shared with the other share- with the other
holders. shareholders.
C) higher in English speaking countries.
D) None of the above.

25. 25) Proxy votes are ... C) votes belong-

ing to an investor
A) votes exercised by small shareholders. other than the per-
B) a thing of the past. son or institution
C) votes belonging to an investor other than the per- exercising them.
son or institution exercising them.
D) votes belonging to foreign shareholders.

26. 26) Strong control and dispersed ownership can be D) All of the above.
achieved by ...

A) proxy votes.
B) dual-class shares.
C) ownership pyramids.
D) All of the above.

27. 27) The typical firm from continental Europe and most B) dispersed own-
of Asia is characterised by ... ership and strong
control.
A) dispersed ownership and weak control.
B) dispersed ownership and strong control.
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C) concentrated ownership and strong control.
D) concentrated ownership and weak control.

28. 28) Which one of the following statements is correct? D) All of the above
are correct.
A) The main corporate governance problem under
strong control and dispersed ownership is the ex-
propriation of the minority shareholders by the large
shareholder.
B) In the presence of weak control and concentrated
ownership, the classic corporate governance prob-
lem, i.e. the principal-agent problem, prevails.
C) In the presence of weak control and dispersed
ownership, the classic corporate governance prob-
lem, i.e. the principal-agent problem, prevails.
D) All of the above are correct.

29. 29) Which one of the following statements is correct? D) All of the above.

A) The free-rider problem prevails in firms that are

widely held.
B) The free-rider problem may result in a lack of share-
holder monitoring of the management.
C) A large shareholder may be a solution to the
free-rider problem.
D) All of the above.

30. 30) The 'loi Florange' is a new law, which became C) Both A) and B)
effective in 2014 in France. are correct.

A) It changed the old system from an opt-in system

to an opt-out system.
B) It confers double-voting rights to shareholders
who have held their shares for at least two years.
C) Both A) and B) are correct.
D) None of the above.

31. 31) According to La Porta et al., ... D) None of the

above.
A) civil law countries provide greater investor protec-
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tion.
B) English law countries have weaker investor rights.
C) common law countries provide weaker sharehold-
er protection.
D) None of the above.

32. 32) Mark Roe argues that ... A) politics drives

corporate gover-
A) politics drives corporate governance. nance.
B) German law is better at protecting investor rights
than French law.
C) proportional voting systems have stronger em-
ployee rights.
D) None of the above.

33. 33) Recent criticisms of La Porta et al.s' theory on the D) All of the above
role of legal families include the following. are correct.

A) As La Porta et al. used secondary sources rather

than the actual law texts, they have made errors in
interpreting the law.
B) The legal family is only a proxy for culture which is
much better at explaining common patterns and dif-
ferences in corporate governance across countries.
C) Some of the criteria that La Porta et al. have re-
tained to measure investor protection are irrelevant
whereas some of those that have been omitted are
clearly relevant.
D) All of the above are correct.

34. 34) The following statement about the taxonomies of B) The varieties
corporate governance systems is correct. of capitalism lit-
erature is based
A) The varieties of capitalism literature argues that on the principle
there is a hierarchy of corporate governance sys- of complementari-
tems. ties.
B) The varieties of capitalism literature is based on
the principle of complementarities.
C) Scandinavian law provides weaker investor protec-

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tion than French law.
D) Electoral systems based on the proportionality
rule have stronger investor rights.

35. 35) Which one of the following statements about Mark C) Politics drives
Roe's taxonomy of corporate governance systems is corporate gover-
true? nance.

A) Social democracies have more hostile takeover

activity.
B) Social democracies will experience a separation of
ownership and control in contrast to more conserva-
tive countries.
C) Politics drives corporate governance.
D) None of the above.

36. 36) Which one of the following statements about the D) None of the
Gramm-Leach-Bliley Act of 1999 is correct? above.

A) This Act removed barriers to capital flows and the

movement of citizens across the member states of
the European Union.
B) This Act introduced American Depository Receipts
(ADRs), enabling foreign firms to cross-list on a US
stock exchange.
C) This Act prevented US banks from engaging in
both commercial and investment banking.
D) None of the above.

37. 37) Which one of the following statements about the D) None of the
insider system is correct? above.

A) Control is dispersed.
B) There is an active market for corporate control and
hostile takeovers are a frequent occurrence.
C) Stock markets are large and highly developed.
D) None of the above.

38. 38) Which one of the following statements is correct? C) Contrary to the
taxonomies pro-
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A) The VOC literature proposes a hierarchy of corpo- posed by the fi-
rate governance systems. nance and law lit-
B) The varieties of capitalism (VOC) literature argues erature, the VOC
that there is a zero-sum game between employee literature does not
rights and investor rights, i.e. one can only be im- assume that the
proved by weakening the other. employee rights
C) Contrary to the taxonomies proposed by the fi- can only be im-
nance and law literature, the VOC literature does not proved by reduc-
assume that the employee rights can only be im- ing investor rights.
proved by reducing investor rights.
D) None of the above.

39. 39) Which one of the following statements is correct? C) Both A and B
are correct.
A) Financialisation consists of turning any asset
which generates cash flows into a tradable security
or a derivative of such a security.
B) Financialisation refers to the increasingly impor-
tant role of the financial industry and capital markets
on a global level.
C) Both A and B are correct.
D) None of the above.

40. 40) Which one of the following statements is correct? A) Supply-side

economics is the
A) Supply-side economics is the exact opposite doc- exact opposite
trine to Keynesian economics as it advocates a focus doctrine to Keyne-
on the supply side of the economy rather than the sian economics as
demand side. it advocates a fo-
B) Supply-side economics argues against globalisa- cus on the supply
tion. side of the econo-
C) US President Ronald Reagan's economic policies my rather than the
were heavily influenced by Keynesian economic the- demand side.
ory.
D) None of the above.

41. 41) Which one of the following statements is correct? C) Both of the
above are correct.
A) The two types of path dependence are struc-

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ture-driven and rule-driven path dependence.
B) Path dependence refers to the impact of history on
current corporate governance arrangements.
C) Both of the above are correct.
D) None of the above are correct.

42. 42) Which one of the following statements is correct? D) Both B and C
are correct.
A) Marco Pagano and Paolo Volpin argue that under
majoritarian electoral systems worker rights will be
stronger.
B) They assume that there is a zero-sum game be-
tween improving worker rights and investor rights.
C) Worker rights will be stronger under proportional
electoral systems.
D) Both B and C are correct.

43. 43) One of the theories linking financial systems to D) All of the above.
economic growth is the corporate governance theory.
Which one of the following statements about this
theory is correct?

A) According to this theory, large shareholders are

likely to interfere too much with the running of the
firm and reduce managerial efficiency.
B) The empirical evidence suggests that, contrary to
the corporate governance theory, it is concentrated
ownership that induces managers and employees to
make firm-specific investments.
C) This theory predicts that industrial activities that
require investments from the management and em-
ployees are more likely to flourish under dispersed
ownership.
D) All of the above.

44. 44) Which one of the following statements about D) These firms
firms from bank-based systems is correct? have similar lever-
age, but source
A) These firms have less leverage as banks only tend most of their debt

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to lend to firms with lots of fixed assets that can be financing from
used as collateral. banks rather than
B) These firms have more leverage than firms from bond markets.
market-based-systems.
C) These firms tend to have banks as their main
shareholders.
D) These firms have similar leverage, but source most
of their debt financing from banks rather than bond
markets.

45. 45) Which one of the following statements is correct? D) All of the
above statements
A) Horizontal associations are likely to improve eco- are correct.
nomic growth as they increase trust in society.
B) There is some evidence of both a negative and pos-
itive effect of horizontal associations on economic
growth and that the two effects cancel each other out.
C) Some argue that horizontal associations are likely
to reduce economic growth given that they are often
self-serving associations that aim at appropriating
economic resources at the cost of the rest of society.
D) All of the above statements are correct.

46. 46) Which one of the following statements is correct? D) All of the above.

A) According to the information collection theory,

stock markets are better at valuing intangible assets
than banks.
B) The renegotiation theory predicts that finan-
cial systems with many small banks will favour
short-term investment projects rather than long-term
ones.
C) The corporate governance theory predicts that in-
dustries requiring substantial investments from the
management and other stakeholders will thrive under
dispersed ownership.
D) All of the above.

47.

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47) Which one of these statements is correct? D) All of the
above statements
A) Trust is reduced by income inequality and land are correct.
property inequality.
B) Trust within a society has been shown to have a
positive impact on economic growth.
C) When one adjusts for the quality of law, trust still
has a positive effect on economic growth.
D) All of the above statements are correct.

48. 48) Compared to US regulation, UK regulation on B) much less pre-

corporate governance is ... scriptive.

A) a fairly recent innovation.

B) much less prescriptive.
C) much more rule based.
D) much more prescriptive.

49. 49) Which one of the following statements is correct? C) Both of the
above statements
A) Some studies have found a positive effect of fe- are correct.
male CEOs on firm performance, but a negative effect
of other female directors.
B) Empirical evidence suggests that effect of female
board representation depends on the industry.
C) Both of the above statements are correct.
D) None of the above.

50. 50) Which one of the following statements is correct? A) A staggered

board is a type of
A) A staggered board is a type of anti-takeover de- anti-takeover de-
vice. vice.
B) Most UK firms have anticipatory takeover defences
in place.
C) Anti-takeover devices are common place in UK
firms.
D) None of the above.

51. 51) Which one of the following statements is correct? A) The

A) The G20/OECD Principles explicitly mention the G20/OECD Prin-
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role of stakeholders in the firm and that their rights ciples explicitly
should be observed as prescribed by law and regula- mention the role
tion. of stakeholders in
B) The G20/OECD Principles are modelled on the An- the firm and that
glo-American system of corporate governance. their rights should
C) The G20/OECD Principles of Corporate Gover- be observed as
nance advocate the maximisation of shareholder val- prescribed by law
ue and do not take into account the role of other and regulation.
stakeholders in the firm.
D) None of the above.

52. 52) Which one the following statements is true? C) Successive

codes of best
A) The Dodd-Frank Act in the USA is on a "comply or practice in the UK
explain" basis. have recommend-
B) The recommendations of UK codes of best prac- ed the separation
tice in corporate governance are on a "comply or of the roles of the
explain" basis for unlisted firms, but compulsory for CEO and the chair
listed firms. of the board of di-
C) Successive codes of best practice in the UK have rectors.
recommended the separation of the roles of the CEO
and the chair of the board of directors.
D) None of the above.

53. 53) The aim of the UK Stewardship Code is ... B) To improve

the quality of
A) To regulate the airline industry, with particular em- engagement be-
phasis on the qualifications of aircrews. tween institution-
B) To improve the quality of engagement between al investors and
institutional investors and their investee firms to in- their investee
crease long-term returns to shareholders and to im- firms to increase
prove corporate governance. long-term returns
C) Both A) and B) are correct. to shareholders
D) None of the above. and to improve
corporate gover-
nance.

54. 54) Which one of the below statements about the D) None of the
'comply or explain' approach to corporate gover- above.

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nance regulation is correct?

A) This approach has generally worked well outside

the UK.
B) This has been the US approach to corporate gov-
ernance regulation.
C) This approach was abandoned by the UK in the
aftermath of the 2008 financial crisis.
D) None of the above.

55. 55) Interlocked boards of directors ... B) consist of di-

rectors of one firm
A) are boards dominated by executive directors. (firm A) sitting on
B) consist of directors of one firm (firm A) sitting on the board of an-
the board of another firm (firm B) and vice-versa. other firm (firm B)
C) are boards that are so large that decision making and vice-versa.
becomes slow and difficult.
D) None of the above.

56. 56) The empirical evidence on the effectiveness of C) No, the exist-
non-executive/ outside directors is conclusive and ing empirical evi-
suggests that the latter increase firm value and per- dence is as yet in-
formance. conclusive.

A) No, the existing evidence suggests that non-exec-

utives reduce firm performance and value.
B) The existing evidence suggests that non-execu-
tives increase firm value, but only if they dominate
the board of directors.
C) No, the existing empirical evidence is as yet incon-
clusive.
D) None of the above.

57. 57) Which one of the following statements is correct? B) In a firm with
duality the func-
A) In a firm with duality the functions of chairman and tions of chair-
CEO are assumed by two separate persons. man and CEO are
B) In a firm with duality the functions of chairman and assumed by the
CEO are assumed by the same person. same person.

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C) Duality consists of a person being both an execu-
tive and a shareholder of the firm.
D) None of the above.

58. 58) Theory suggests that ... C) For firms, for

which the adviso-
A) Greater board independence is always advisable. ry role of the board
B) Less board independence is always preferable. is more important
C) For firms, for which the advisory role of the board than the monitor-
is more important than the monitoring role, a less ing role, a less in-
independent board may be optimal. dependent board
D) None of the above. may be optimal.

59. 59) The expression 'the glass ceiling' refers to ... C) The difficulty
that women face
A) The great accountability of non-executive direc- to move to the
tors. higher echelons in
B) The increasing pressure put on companies by the companies.
general public to reduce greenhouse gases.
C) The difficulty that women face to move to the high-
er echelons in companies.
D) None of the above.

60. 60) Dividends may fulfil a corporate governance role. D) All of the above
are correct.
A) Forcing managers to pay out high dividends re-
duces the free-cash-flow problem.
B) Forcing managers to pay out high dividends is one
way of addressing the principal-agent problem.
C) Dividends have been shown to be less flexible in
the UK and the USA compared to Germany.
D) All of the above are correct.

61. 61) Empirical studies suggest that targets of hostile D) do not dif-
takeovers ... fer in terms of
their pre-acquisi-
A) are more likely to be continental European compa- tion performance
nies rather than UK and US companies. when compared
B) have weaker pre-acquisition performance than tar- to targets of
gets of friendly takeovers and non-acquired firms. friendly takeovers
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C) have better pre-acquisition performance than tar- and non-acquired
gets of friendly takeovers and non-acquired firms. firms.
D) do not differ in terms of their pre-acquisition
performance when compared to targets of friendly
takeovers and non-acquired firms.

62. 62) Studies analysing the impact of managerial own- A) evidence that
ership on firm value have found ... managerial own-
ership increases
A) evidence that managerial ownership increases firm value, but only
firm value, but only when the latter is assumed to be when the latter is
exogenous. assumed to be ex-
B) consistent evidence that managerial ownership ogenous.
increases firm value.
C) that managerial ownership destroys firm value.
D) None of the above.

63. 63) The empirical evidence on institutional investors C) They tend to

suggests the following: be mostly pas-
sive, but some of
A) They are always passive. them act behind
B) They are typically active investors. the scenes.
C) They tend to be mostly passive, but some of them
act behind the scenes.
D) None of the above.

64. 64) Which one of the following statements as to the D) Both B and C
theoretical impact of competition on managerial per- are correct.
formance and firm value is true?

A) Competition always increases managerial perfor-

mance.
B) Competition may reduce as well as increase man-
agers' incentives to work hard.
C) The positive income effect dominates only under
certain, specific conditions.
D) Both B and C are correct.

65. 65) Which one of the following statements is correct? D) All of the above.

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A) Proxy contests in the USA tend to result in an
increase in the targeted firm's stock price.
B) Proxy contests in the Europe normally cause a
drop in the stock price of the targeted firm.
C) While their outcome is not binding for the manage-
ment, proxy contests in the USA are more likely to
earn shareholder approval than in Europe.
D) All of the above.

66. 66) Which one of the following statements is correct? D) All of the above.

A) Managerial compensation has been shown to be

sensitive to firm size.
B) The components of managerial compensation as
well as their importance vary across countries.
C) Managerial compensation has been shown to be
sensitive to firm performance.
D) All of the above.

67. 67) Which one of the following statements is correct? C) The empiri-
cal evidence is
A) Only proxy votes exercised by banks seem to have as yet inconclu-
a positive effect on firm performance. sive about the ef-
B) Bank ownership of equity has been show generally fects of bank own-
to have a negative effect on firm performance. ership on firm per-
C) The empirical evidence is as yet inconclusive formance.
about the effects of bank ownership on firm perfor-
mance.
D) None of the above.

68. 68) Empirical evidence suggests that ... D) Both A) and C)

are correct.
A) Competition acts as a substitute for corporate
governance.
B) It acts as a complement for corporate governance.
C) It may reduce the need for good corporate gover-
nance.
D) Both A) and C) are correct.

69.
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69) Which one of the following statements is correct? C) Both A) and C)
are correct.
A) According to the outcome model, minority share-
holders pressurise insiders (managers and large
shareholders) to pay out high dividends.
B) According to the substitute model, insiders pay
out high dividends to build up a reputation that they
treat their minority shareholders well as this repu-
tation is needed when the firm needs more external
financing.
C) Both A) and C) are correct.
D) None of the above.

70. 70) Which one of the following statements is correct? D) Both state-
ments B and C are
A) Political connections always destroy firm value. correct.
B) Business people who become politicians tend to
create value for their firms.
C) There is some evidence that political connections
create firm value.
D) Both statements B and C are correct.

71. 71) Which one of the following statements is correct? D) All of the above.

A) Recently privatised SOEs should not have own-

ership by managers and employees as this reduces
risk- taking behaviour necessary for their restructur-
ing.
B) The disciplinary role of debt is unlikely to work
in recently privatised SOEs from emerging markets
given the weak creditor protection.
C) Recently privatised SOEs should be controlled
by foreign investors with experience of competitive
markets.
D) All of the above.

72. 72) Which one of the following statements is incor- D) All of the above
rect? statements are in-
correct.

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A) Entrepreneur wealth has been associated with
strong economic growth.
B) Inherited wealth has been shown to have a nega-
tive effect on economic growth.
C) Familism refers to strong family ties and the pos-
sible limitations these may cause for firm growth and
the emergence of firms in industries that are not
typically associated with family ownership.
D) All of the above statements are incorrect.

73. 73) Which one of the following statements is true? C) There is

some disagree-
A) The example of China shows that economic devel- ment across acad-
opment requires strong investor rights. emia as to
B) There is agreement that large equity markets are whether large eq-
a necessary and sufficient condition for economic uity markets are
development. a necessary and
C) There is some disagreement across academia as sufficient condi-
to whether large equity markets are a necessary and tion for economic
sufficient condition for economic development. development.
D) Large equity markets and strong investor rights
are incompatible.

74. 74) Which of the following statements is correct? C) Both A) and B)

A) During Victorian times, investor protection provid- are correct.
ed by company law was virtually nil.
B) Companies managed to provide investor protec-
tion via their articles of association.
C) Both A) and B) are correct.
D) None of the above.

75. 75) Contractual corporate governance relates to ...D) the ways

whereby firms
A) improving national corporate governance regula- can improve their
tion via codes of best practice. corporate gov-
B) managerial compensation contracts. ernance beyond
C) shareholder protection offered by the country's their country's
legal system. standards.

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D) the ways whereby firms can improve their corpo-
rate governance beyond their country's standards.

76. 76) Reincorporations in other states or countries are C) It is as yet

a means for companies to improve or worsen their not clear whether
corporate governance. Which one of the following regulatory compe-
statements is correct as to regulatory competition tition will result in a
between states and countries? race to the top or
to the bottom.
A) It will result in a race to the top.
B) States and countries that cater for managers will
attract most incorporations and reincorporations.
C) It is as yet not clear whether regulatory competi-
tion will result in a race to the top or to the bottom.
D) Regulatory competition will result in a race to the
top.

77. 77) Which one of the following statements correctly B) The large
describes the bonding hypothesis? shareholder com-
mits him/herself
A) Banks require covenants when lending to risky not to expropriate
companies. the minority share-
B) The large shareholder commits him/herself not to holders by sub-
expropriate the minority shareholders by subjecting jecting the firm to
the firm to more stringent foreign regulation. more stringent for-
C) Shareholders bond themselves to managers by eign regulation.
agreeing not to sell their shares over a specified pe-
riod.
D) None of the above.

78. 78) Which one of the following statements correctly C) The bootstrap-
describes the bootstrapping effect? ping effect con-
sists of a bid-
A) This effect consists of the improvement in corpo- der with weak-
rate governance of the target. er corporate gov-
B) Tying boots is difficult. ernance adopting
C) The bootstrapping effect consists of a bidder with the corporate gov-
weaker corporate governance adopting the corporate ernance of the tar-
governance of the target company it is taking over.

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D) The bootstrapping effect relates to the benefits the get company it is
target company derives from being taken over by a taking over.
bidder with better corporate governance.

79. 79) Which one of the following statements is correct? D) All of the above.

A) The bootstrapping effect refers to a bidder with

weaker corporate governance benefiting from the
better corporate governance of its target.
B) The positive spillover effect refers to the improve-
ment in the target's corporate governance as a result
of it being taken over by a bidder with better corporate
governance.
C) The negative spillover effect refers to the worsen-
ing of the target's corporate governance as a result of
it being taken over by a bidder with weaker corporate
governance.
D) All of the above.

80. 80) Which one of the following statements is correct? C) According to

the incorporation
A) According to the real seat principle, the law apply- principle, the law
ing to the firm is that of its country of incorporation. applying to the
B) The incorporation principle makes it more difficult firm is that of its
for a firm to move than the real seat principle. country of incor-
C) According to the incorporation principle, the law poration.
applying to the firm is that of its country of incorpo-
ration.
D) None of the above.

81. 81) Which one of the following statements is correct? D) All of the above.

A) The shareholder-exploitation hypothesis predicts

that regulatory competition will result in a race to the
bottom.
B) The cost-avoidance hypothesis predicts that regu-
latory competition will result in a race to the top.
C) There is as yet no conclusive evidence as to which

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of the above two competing hypotheses is valid.
D) All of the above.

82. 82) What is grandstanding by venture capitalists B) Grandstanding

(VCs)? consists of young
VCs improving
A) Grandstanding consists of VCs creating firm value their reputation by
via their support of the management and the net- rushing their in-
works they offer. vestee firms to
B) Grandstanding consists of young VCs improving the stock mar-
their reputation by rushing their investee firms to ket, thereby cre-
the stock market, thereby creating a successful track ating a successful
record. track record.
C) Grandstanding consists of VCs refusing to take a
company public.
D) None of the above.

83. 83) Which one of the following statements is correct? B) There is evi-
dence suggesting
A) The empirical evidence suggests that there is a link that the evolu-
between the bad long-term performance of IPOs and tion of ownership
post-IPO ownership and control. and control after
B) There is evidence suggesting that the evolution of the IPO depends
ownership and control after the IPO depends on firm on firm character-
characteristics. istics.
C) None of the above.
D) All of the above.

84. 84) Which one of the following statements is correct? D) None of the
above.
A) A lock-in agreement can take the form of an own-
ership pyramid.
B) Such an agreement consists of underpricing the
IPO shares to keep control by outsiders down.
C) A lock-in agreement consists of the incumbent,
selling shareholders preventing new shareholders
from obtaining board seats.
D) None of the above.

85.
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85) Which one of the following statements is correct? B) Stage financ-
ing is used by
A) Stage financing consists of the financing of theatre venture capital-
plays. ists and con-
B) Stage financing is used by venture capitalists and sists of financ-
consists of financing that is gradually released as the ing that is grad-
firm achieves previously agreed milestones. ually released as
C) Stage financing is one of the main ways of financ- the firm achieves
ing in the film industry. previously agreed
D) None of the above. milestones.

86. 86) Which one of the following statements is correct? A) There is evi-
dence in favour of
A) There is evidence in favour of both the manage- both the manage-
ment support hypothesis and the grandstanding hy- ment support hy-
pothesis for the case of VCs in IPO firms. pothesis and the
B) There is very little evidence about the positive grandstanding hy-
impact of venture capitalists (VCs) on IPO firms. pothesis for the
C) There is evidence in favour of the management case of VCs in IPO
support hypothesis, but no evidence in favour of the firms.
grandstanding hypothesis for the case of VCs in IPO
firms.
D) None of the above.

87. 87) Which one of the following statements is true? D) All of the above
are correct.
A) Pre-IPO shareholders may use the size of their
retained ownership as a signal of firm quality.
B) There is evidence that the incumbent shareholders
use IPO underpricing to keep ownership by outsiders
dispersed.
C) A lock-in agreement prevents the pre-IPO share-
holders from selling their remaining shares during a
certain period following the IPO.
D) All of the above are correct.

88. 88) Which one of these statements about Finkel- C) Finkelstein dis-
stein's dimensions of CEO power is correct? tinguishes four di-

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A) Structural power always exceeds prestige power mensions of CEO
unless the CEO has significant expert power. power.
B) Most of the prestige power is derived from expert
power whereas the reverse is not always the case.
C) Finkelstein distinguishes four dimensions of CEO
power.
D) None of the above.

89. 89) Which one of these statements about IPO firms is D) All of the above.
correct?

A) The governance needs of IPO firms are likely to be

very different from those of mature firms.
B) IPO firms are more likely to require advice rather
than monitoring from their board of directors.
C) Some anti-takeover devices, such as dual-class
shares, may create rather than destroy shareholder
value for the case of IPO firms.
D) All of the above.

90. 90) A decision problem suffering from a narrow fram- A) the way the in-
ing or packaging effect means that ... formation is pre-
sented matters
A) the way the information is presented matters and and may change
may change the decision taken. the decision tak-
B) there is a principal-agent problem. en.
C) transportation costs will be excessive.
D) it is likely that there is a pyramid of ownership
creating strong control and dispersed ownership.

91. 91) Randall Morck suggests that there are two types D) All of the above
of principal-agency problems. are correct.

A) The type I agency problem is the classic princi-

pal-agent problem between the managers and share-
holders.
B) Contrary to type I, the type II agency problem is
caused by excessive loyalty.
C) The type I agency problem stems from a lack of loy-

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alty of managers to their principal, the shareholders.
D) All of the above are correct.

92. 92) Studies investigating human behaviour suggest D) None of the

that ... above is correct.

A) experts are less likely to be overconfident when

the task/ information is opaque and complex.
B) men are less likely to be overconfident than
women.
C) women are much more likely to be overconfident
than men.
D) None of the above is correct.

93. 93) Which one of the following statements is correct? D) All of the above.

A) The representative heuristic describes a bias in hu-

man behaviour which consists of drawing inferences
from small samples that are too strong and doing the
opposite for large samples.
B) Hubris is a type of overconfidence relating to
takeovers whereby bidding managers overestimate
the takeover gains.
C) Heuristic simplification consists of simplifying de-
cision problems by using rules of thumb.
D) All of the above.

94. 94) Which one of the following statements is correct? B) For overconfi-
dence to persist,
A) Biased self-attribution consists attributing posi- there needs to
tive outcomes to external circumstances. be biased self-at-
B) For overconfidence to persist, there needs to be tribution.
biased self-attribution.
C) Biased self-attribution is the opposite of the funda-
mental attribution error.
D) None of the above.

95. 95) Which one of the following statements is correct? A) Persistent-

ly high levels
A) Persistently high levels of testosterone seem to of testosterone
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increase risk-taking behaviour that does not neces- seem to increase
sarily result in higher returns. risk-taking behav-
B) Persistently high levels of testosterone seem to iour that does not
increase risk-taking behaviour and result in higher necessarily result
returns. in higher returns.
C) Testosterone seems to explain why women are
more willing to take risk.
D) None of the above.

96. 96) Which one of the following statements is correct? D) None of the
above.
A) Women are more likely to engage in competitions
than men.
B) Women are less risk averse when it comes to in-
vestment decisions.
C) Women tend to react less to social cues than men.
D) None of the above.

97. 97) Which one of the following statements is correct? C) Age differ-
ences between
A) Age differences between directors do not seem to the CEO and
matter. chairman have
B) Age differences between directors have been been shown to re-
shown to result in less monitoring by the board. sult in more moni-
C) Age differences between the CEO and chairman toring.
have been shown to result in more monitoring.
D) None of the above.

98. 98) Which one of the following statements is correct? B) One way
of addressing be-
A) One way of addressing behavioural biases is to havioural bias-
conduct a so-called post-mortem. es is to con-
B) One way of addressing behavioural biases is to duct a so-called
conduct a so-called pre-mortem. pre-mortem.
C) Both A) and B) are correct.
D) None of the above.

99. 99) Socially-responsible investment (SRI) funds ... D) None of the

above.
A) underperform relative to the stock market as well
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as relative to conventional funds.
B) underperform relative to conventional funds.
C) outperform relative to the stock market.
D) None of the above.

100. 100) Which one of the following definitions of corpo- A) CSR deals
rate social responsibility (CSR) is correct? with the manageri-
al consideration of
A) CSR deals with the managerial consideration of non-market forces
non-market forces or social aspects of corporate ac- or social aspects
tivity outside a market or regulatory framework and of corporate activ-
includes consideration of issues such as employ- ity outside a mar-
ee welfare, community programmes, charitable dona- ket or regulato-
tions, and environmental protection. ry framework and
B) CSR deals with the managerial consideration of includes consider-
market forces. ation of issues
C) CSR deals with the managerial consideration of such as employee
non-market forces or social aspects of corporate ac- welfare, commu-
tivity within a market or regulatory framework and nity programmes,
includes consideration of issues such as employ- charitable dona-
ee welfare, community programmes, charitable dona- tions, and environ-
tions, and environmental protection. mental protection.
D) CSR deals with the managerial consideration of
market forces or social aspects of corporate activity
outside a market or regulatory framework and in-
cludes consideration of issues such as employ

101. 101) The empirical literature suggests that ... A) Only CSR im-
proving the firm's
A) Only CSR improving the firm's relations with relations with its
its primary stakeholders improves financial perfor- primary stake-
mance. holders improves
B) There is a positive link between firm performance financial perfor-
and CSR. mance.
C) CSR is higher in common law countries.
D) It is not important to distinguish between the type
of corporate social responsibility (CSR) when study-
ing the impact on firm performance.

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102. 102) Which one of the following statements is cor- D) All of the above.
rect?

A) CSR attributes normally include community rela-

tions and the environment.
B) An exclusionary screen is also sometimes called
a sin industry.
C) Tobacco is an example of a frequently used exclu-
sionary screen.
D) All of the above.

103. 103) Which one of the following statements is cor- A) Most religions
rect? include command-
ments about so-
A) Most religions include commandments about so- cially responsible
cially responsible investment (SRI). investment (SRI).
B) SRI is a fairly recent concept and is therefore not
touched by most world religions.
C) Very few religions include commandments about
SRI.
D) None of the above.

104. 104) Empirical evidence suggests that ... D) All of the above.

A) Firms with better corporate governance are more

likely to engage in CSR.
B) Firms from common law countries have lower CSR
ratings.
C) Firms from Scandinavian countries have the high-
est CSR ratings.
D) All of the above.

105. 105) Which of the following statements about the C) Both A) and B)
United Nations Principles of Responsible Investment are correct.
(PRI) is correct?

A) The PRI are aimed at institutional investors.

B) The PRI are a set of six principles.

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C) Both A) and B) are correct.
D) None of the above.

106. 106) One of the reasons why there is conflicting ev- C) Banks tend to
idence about the benefits from close bank-relation- smooth out the in-
ships is that ... terest rates they
charge to firms
A) Close bank ties only exist in countries with weak over time.
disclosure and financial data of low quality.
B) Banks only lend to young and risky firms that
justify higher interest rates.
C) Banks tend to smooth out the interest rates they
charge to firms over time.
D) None of the above.

107. 107) Which one of the following statements about B) Debtholders

debtholder expropriation is true? tend to lose
out in lever-
A) Debtholders tend to expropriate shareholders in aged buy-outs and
firms with dispersed ownership and control. acquisitions by
B) Debtholders tend to lose out in leveraged buy-outs hedge funds.
and acquisitions by hedge funds.
C) There is no consistent evidence of debtholder ex-
propriation.
D) None of the above.

108. 108) Which one of the following statements about A) There is a

relationship-based banking is correct? danger that the
bank will end with
A) There is a danger that the bank will end with mo- monopolistic pow-
nopolistic power given the information it collects on er given the infor-
the firm. mation it collects
B) Relationship-based banking typically makes firms on the firm.
more dependent on internal funds.
C) A close, long-term relationship between a bank
and a firm will increase asymmetry of information
between the two.
D) None of the above.

109.
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109) Andrei Shleifer and Laurence Summers's breach A) the new man-
of trust hypothesis refers to: agement, follow-
ing a change in
A) the new management, following a change in own- ownership, break-
ership, breaking the implicit contracts the old man- ing the implic-
agement had with the workforce. it contracts the
B) employees stealing from their employer and break- old management
ing the latter's trust. had with the work-
C) Both of the above are correct. force.
D) None of the above are correct.

110. 110) Which one of the following statements about B) The firm's em-
employee representation on the board of directors is ployees sitting on
true? the board tend to
increase firm val-
A) Employee board representation invariably increas- ue whereas trade
es firm value. union representa-
B) The firm's employees sitting on the board tend to tives on the board
increase firm value whereas trade union representa- seem to reduce
tives on the board seem to reduce firm value. firm value.
C) Employee board representation invariably reduces
firm value.
D) None of the above.

111. 111) Which one of the following statements is cor- D) Statements B

rect? and C are correct.

A) The market reaction to employee stock option

plans (ESOPs) is typically negative, suggesting that
employee stock ownership destroys firm value.
B) ESOPs also generate tax benefits and this makes
it more difficult to assess the benefits arising from
employee stock ownership.
C) Studies on the market reaction to ESOPs find ei-
ther positive or insignificant abnormal returns.
D) Statements B and C are correct.

112. 112) Which one the following statements is true? D) None of the
above.

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A) The varieties of capitalism (VOC) theory argues
that there is a zero-sum game between improving
employee rights and improving investor rights.
B) The VOC literature predicts that strong employee
rights reduce economic growth.
C) According to the law and finance literature, strong
employee rights can exist alongside strong share-
holder rights.
D) None of the above.

113. 113) What is a Chinese wall? C) Chinese walls

are set up within
A) These are rules that prevent gatekeepers from talk- investment banks
ing to each other. to separate de-
B) The Great Wall of China is probably the most fa- partments and
mous example of a Chinese wall. persons that hold
C) Chinese walls are set up within investment banks private informa-
to separate departments and persons that hold pri- tion from those
vate information from those that may benefit from that may benefit
that private information. from that private
D) None of the above. information.

114. 114) Which one of the following is the correct defini- C) Capture refers
tion of capture? to the influence
a client or super-
A) Capture is one of the desirable attributes for gate- visee may have
keepers. over its gatekeep-
B) Capture refers to a successful hostile takeover and er and which may
seizing control of the target. prevent the latter
C) Capture refers to the influence a client or super- from fulfilling its le-
visee may have over its gatekeeper and which may gal duties.
prevent the latter from fulfilling its legal duties.
D) None of the above.

115. 115) Which one of the following statements is cor- B) Section 203 of
rect? SOX requires that
the lead audit part-
A) Section 203 of the Sarbanes-Oxley Act (SOX) pre- ner and the au-
scribes that audit firms should be rotated every five dit partner respon-

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years. sible for reviewing
B) Section 203 of SOX requires that the lead audit the audit are rotat-
partner and the audit partner responsible for review- ed every five fiscal
ing the audit are rotated every five fiscal years. years.
C) There is no such section in SOX.
D) None of the above

116. 116) Which one of the following statements is cor- C) The existing ev-
rect? idence is as yet in-
conclusive about
A) The empirical evidence clearly suggests that in- the impact of in-
dustry regulation improves corporate governance. dustry regulation
B) The existing evidence suggests that industry regu- on corporate gov-
lation is a substitute for good corporate governance. ernance.
C) The existing evidence is as yet inconclusive about
the impact of industry regulation on corporate gover-
nance.
D) None of the above.

117. 117) Which one of the following statements is cor- A) Forensic fi-
rect? nance deals with
misconducts and
A) Forensic finance deals with misconducts and mal- malpractice in fi-
practice in financial markets. nancial markets.
B) Forensic finance deals with the investigation of the
financial affairs of victims of violent crimes.
C) Forensic finance deals with the investigation of
financial fraud in IPO firms.
D) None of the above.

118. 118) Which one of the following statements is cor- B) There is some
rect? evidence of re-
verse causality
A) There is a clear direction of causality from corpo- as some firms
rate governance ratings to firm value with the former with weak per-
affecting the latter. formance adopted
B) There is some evidence of reverse causality as anti- takeover de-
some firms with weak performance adopted anti- vices, which, in
takeover devices, which, in turn, harmed their future turn, harmed their

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corporate governance ratings. future corporate
C) Both A) and B) are correct. governance rat-
D) None of the above. ings.

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