Question 1:
What are the battling functions of the board of directors?
Advice vs monitor
Question 2:
What is a captured board, and does it perform normally?
Yes; capture board: directors are loyal to the managers; so monitoring duties have been
compromised because of the loyalties to management.
Question 3:
What is the effect of a CEO founding death?
On average, upon their death the stock price increases somewhat, indicating the executives
were value destroying.
Question 4:
Assume you are a large shareholder of a US firm that disagrees with management on an
important long-term topic. You are convinced that your idea is better for shareholder value.
You want to remain a shareholder of the firm, but management refuses to talk to you. Even
though you do not know how to directly get in touch with the other shareholders of the firm,
and you don’t want to go through media, you think these other shareholders will agree with
you. Which strategy could you follow that is likely to provide the best chance of having you
ideas implemented?
Having it put up for a vote at the annual meeting
Question 5:
Some firms pay their executives with dividend-protected relative performance-based stock
options. Because of the dividend protection, the value of these options do not depend on
the dividend payments of the firm. Because of the relative performance feature, the value of
these options are adjusted for stock price movements of the industry that the firm operates
in. What is/are the remaining weaknesses of the above described stock options?
Valuation. Executive is not risk-neutral and values the options less than what they will cost
the firm (it is given that the current compensation scheme is already relative to industry
peers, so other weaknesses such as market crash does not hold any more)
Question 6:
Andrade et al study announcement returns and find a 16% abnormal return in the window -
1, 1 where 0 is the announcement date and a 23 % return over a window starting 20 days
before the announcement. Why are target abnormal returns over the period -20, 1 typically
even more positive than over -1, 1.
Information leakage/ insider trading
What are the battling functions of the board of directors?
Advice vs monitor
Question 2:
What is a captured board, and does it perform normally?
Yes; capture board: directors are loyal to the managers; so monitoring duties have been
compromised because of the loyalties to management.
Question 3:
What is the effect of a CEO founding death?
On average, upon their death the stock price increases somewhat, indicating the executives
were value destroying.
Question 4:
Assume you are a large shareholder of a US firm that disagrees with management on an
important long-term topic. You are convinced that your idea is better for shareholder value.
You want to remain a shareholder of the firm, but management refuses to talk to you. Even
though you do not know how to directly get in touch with the other shareholders of the firm,
and you don’t want to go through media, you think these other shareholders will agree with
you. Which strategy could you follow that is likely to provide the best chance of having you
ideas implemented?
Having it put up for a vote at the annual meeting
Question 5:
Some firms pay their executives with dividend-protected relative performance-based stock
options. Because of the dividend protection, the value of these options do not depend on
the dividend payments of the firm. Because of the relative performance feature, the value of
these options are adjusted for stock price movements of the industry that the firm operates
in. What is/are the remaining weaknesses of the above described stock options?
Valuation. Executive is not risk-neutral and values the options less than what they will cost
the firm (it is given that the current compensation scheme is already relative to industry
peers, so other weaknesses such as market crash does not hold any more)
Question 6:
Andrade et al study announcement returns and find a 16% abnormal return in the window -
1, 1 where 0 is the announcement date and a 23 % return over a window starting 20 days
before the announcement. Why are target abnormal returns over the period -20, 1 typically
even more positive than over -1, 1.
Information leakage/ insider trading
