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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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Nate 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 start-up recruits Nate based on his stated credentials without verifying them. Two days into the job, Nate's team lead realizes that Nate 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 B)
F) None of the above

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Law and ethics are not synonymous. Elaborate on this statement with the help of an example.

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Student examples will vary. A sample ans...

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How can top management foster ethical behavior in employees? Provide an example that you have read about or that comes from your own experience.

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Student examples will vary. A sample ans...

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How does the market for corporate control work? Provide at least one example. The example can be from your reading in this class, your reading in other classes, or your own experience.

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Student examples will vary. A sample ans...

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Which of the following is true of business ethics?


A) Certain notions such as fairness, honesty, and reciprocity are universal norms.
B) Business ethics is an agreed-upon code of conduct in business, based on laws.
C) The perception of what is ethical and what is not is similar across different cultures.
D) Business ethics needs to be codified into law in order to be followed.

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

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Describe the arguments for and against the CEO of a company serving as the chair of the board of directors.

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In roughly one-half of U.S. public firms...

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How does a leveraged buyout affect a public company?

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In a leveraged buyout (LBO), a single in...

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Which of the following is a major issue at the forefront of CEO compensation in recent years?


A) a comparison of the performance of the organization before and after the CEO's tenure
B) the performance of the CEO as an employee versus the performance as a board member
C) the absolute size of the CEO pay package compared with the pay of the average employee
D) a comparison of the compensation of senior management hired during and before the CEO's tenure

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

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Which of the following is true of the codes of conduct of an organization?


A) They detail how the organization expects an employee to behave and to represent the company in business dealings.
B) They are a reiteration of the laws pertaining to business dealings in a corporate environment.
C) They are a guide to determine what is lawful and what is unlawful.
D) They help the board of directors and the CEO implement shareholder capitalism.

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

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Which of the following is the source of the principal-agent problem in publicly traded companies?


A) the law of legal personality
B) the separation of ownership and control
C) limited liability for investors
D) transferability of investor ownership

E) B) and D)
F) A) and D)

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One of the most challenging aspects of principal-agent problems is that firms have almost no defenses against them.

A) True
B) False

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Why is board independence critical to effectively fulfilling a board's governance responsibilities?

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Board independence is critical to effect...

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How does Nobel laureate Milton Friedman's view of the firm's social obligations tie in with shareholder capitalism?

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Nobel laureate Milton Friedman stated hi...

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Which of the following real-world scenarios best exemplifies information asymmetry in a public stock company?


A) Based on a tip-off by a Goldman Sachs employee, the Galleon Group sold its holdings in Goldman Sachs' stocks prior to the announcement of missed earnings estimates.
B) GE knew that it could create a profitable venture out of producing green products, so it rolled out the Ecomagination strategy.
C) Mark Hurd, CEO of HP, was unaware of the sexual harassment allegations, and the board's demand for him to resign caught him by surprise.
D) Goldman Sachs followed through with the Abacus deal despite knowing its shortcomings.

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

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According to Michael Porter, which of the following is a problem with many publicly traded companies?


A) Shareholders of publicly traded companies do not have a legitimate claim on profits.
B) They have defined value creation too narrowly in terms of financial performance.
C) There is no transferability of stock ownership in publicly traded companies.
D) Publicly traded companies have no legal standing and are not responsible for their debts.

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

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Dinesh is a senior manager at a large, publicly traded corporation. He has access to insider information about the company profits, losses, mergers, and acquisitions. It is legally and ethically acceptable for him to have this information as long as he does not use it to buy or sell stocks and does not tell others to buy or sell stocks.

A) True
B) False

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Arnold is a firm believer in Milton Friedman's view of a firm's social obligations. With which of the following statements is Arnold most likely to agree?


A) Businesses can use their resources to create profit as long as they do so within the rules of the game.
B) Firms must go beyond their economic responsibility and act in socially responsible ways.
C) Firms should define value creation broadly in terms of environmental impact.
D) Businesses should engage in open and free competition without deception or fraud, only as long as their competitors do so.

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

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In a public stock company, senior executives, such as the CEO, face agency problems when


A) they delegate authority of strategic business units to general managers.
B) they decide to get involved in the day-to-day operations of a company.
C) the board of directors possesses more information about the company than they do.
D) the firm designs work tasks, incentives, and employments that minimize opportunism.

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

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Starling Inc. is a public stock company that provides natural gas for businesses. Although this company generates a large profit, management's focus on reducing costs caused the maintenance budget to be trimmed. Its pipelines have at times leaked, which created significant environmental problems. As a result, the company's value creation has suffered. This scenario supports Michael Porter's warning that public companies


A) often do not keep economic needs and societal needs separate from each other, thereby contributing to low value creation.
B) have defined value creation too narrowly in terms of financial performance, thereby contributing to black swan events.
C) do not focus enough on increasing firm profits, thereby contributing to low value creation.
D) have defined value creation too narrowly and as a result have ignored political lobbying, thereby contributing to black swan events.

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

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