MGST 451 QUIZ 1 REVIEW 37 QUESTIONS WITH
VERIFIED ANSWERS
- urge Boards to align with changing expectations regarding how Boards are
created and relationships between Boards and shareholders - CORRECT ANSWER
Why were the Dey and Kaplan recommendations developed in Canada?
- a system of mechanisms implemented by a company to prevent or deter self-
interested managers from partaking in activities that would be harmful to
shareholders and stakeholders
- minimum is to have a BoD and external auditor
- meant to reduce agency costs - CORRECT ANSWER What is Corp. Governance
- Principal is BoD, Agent is Management
- The problem is that Agents are not willing to be held accountable for their
actions unless they own enough stocks in the corporation. (careful spending their
own money, not others')
- Shareholders want to increase firm's value, Managers want nice cars and popular
decisions
- information asymmetry between principal and agent - CORRECT ANSWER What
is the principal-agent problem?
- costs that shareholders and stakeholders must bear due to self-interested
managers making decisions that only benefit them
- a result of the principal-agency problem
- ex) value forgone due to imperfect monitoring of Managers - CORRECT ANSWER
What are agency costs
, the problem of incomplete information - of choosing alternatives without fully
knowing the details of available options. Increases the likelihood of selecting
inferior alternatives - CORRECT ANSWER Adverse Selection
Increases the incentive of one party to take undue risks or shirk other
responsibilities (remember RMIN, if you insure an event, people will be less
careful). The costs are transferred to another party - CORRECT ANSWER Moral
Hazard
Company is deciding what to do with FCF. Shareholders want dividends to control
how they are invested, which managers want to diversify the business to reduce
their risk of unemployment. - CORRECT ANSWER example of agency problem
- consuming excessive perks
- managers with a fixed salary will slack off
- being too risk averse to avoid being fired
- taking high risks for a bigger bonus
- slacking off if retirement is near - CORRECT ANSWER Examples of agency costs
1. Accountability
- management accountable to BoD who is accountable to shareholders
2. Fairness
- protect and treat shareholders equally
3. Transparency
VERIFIED ANSWERS
- urge Boards to align with changing expectations regarding how Boards are
created and relationships between Boards and shareholders - CORRECT ANSWER
Why were the Dey and Kaplan recommendations developed in Canada?
- a system of mechanisms implemented by a company to prevent or deter self-
interested managers from partaking in activities that would be harmful to
shareholders and stakeholders
- minimum is to have a BoD and external auditor
- meant to reduce agency costs - CORRECT ANSWER What is Corp. Governance
- Principal is BoD, Agent is Management
- The problem is that Agents are not willing to be held accountable for their
actions unless they own enough stocks in the corporation. (careful spending their
own money, not others')
- Shareholders want to increase firm's value, Managers want nice cars and popular
decisions
- information asymmetry between principal and agent - CORRECT ANSWER What
is the principal-agent problem?
- costs that shareholders and stakeholders must bear due to self-interested
managers making decisions that only benefit them
- a result of the principal-agency problem
- ex) value forgone due to imperfect monitoring of Managers - CORRECT ANSWER
What are agency costs
, the problem of incomplete information - of choosing alternatives without fully
knowing the details of available options. Increases the likelihood of selecting
inferior alternatives - CORRECT ANSWER Adverse Selection
Increases the incentive of one party to take undue risks or shirk other
responsibilities (remember RMIN, if you insure an event, people will be less
careful). The costs are transferred to another party - CORRECT ANSWER Moral
Hazard
Company is deciding what to do with FCF. Shareholders want dividends to control
how they are invested, which managers want to diversify the business to reduce
their risk of unemployment. - CORRECT ANSWER example of agency problem
- consuming excessive perks
- managers with a fixed salary will slack off
- being too risk averse to avoid being fired
- taking high risks for a bigger bonus
- slacking off if retirement is near - CORRECT ANSWER Examples of agency costs
1. Accountability
- management accountable to BoD who is accountable to shareholders
2. Fairness
- protect and treat shareholders equally
3. Transparency
