Corporate Governance And Ethics MCQ Questions And Answers
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- 1.
For moral hazard to exist, there needs to be ...
- A.
Symmetry of information.
- B.
Asymmetry of information.
- C.
The possibility of complete contracts.
- D.
None of the above.
Correct Answer
B. Asymmetry of information.Explanation
For moral hazard to exist, there needs to be asymmetry of information. Asymmetry of information refers to a situation where one party involved in a transaction has more information than the other party. In the context of moral hazard, it means that one party, usually the agent, has more information about their actions and behaviors that can affect the outcome of the transaction, while the other party, usually the principal, has limited information. This information imbalance creates the opportunity for the agent to take actions that are not in the best interest of the principal, leading to moral hazard.Rate this question:
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- 2.
Related-party transactions may consist of ...
- A.
Managers becoming entrenched.
- B.
Tunnelling and transfer pricing.
- C.
Transactions between shareholders of the same political persuasion.
- D.
None of the above.
Correct Answer
B. Tunnelling and transfer pricing.Explanation
Related-party transactions refer to transactions between two parties who have a close relationship or connection, such as family members or entities under common control. These transactions can create opportunities for abuse, such as managers becoming entrenched or engaging in tunnelling and transfer pricing activities. Tunnelling refers to the transfer of assets or funds from one entity to another, often to the detriment of one party. Transfer pricing involves setting the prices for goods, services, or intellectual property transferred between related parties, which can be manipulated to minimize tax liabilities or shift profits. Therefore, the correct answer is tunnelling and transfer pricing.Rate this question:
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- 3.
The agency problem of debt consists of the following:
- A.
The debtholders forcing the managers to expropriate the shareholders.
- B.
Banks using proxy votes.
- C.
The shareholders expropriating the debtholders.
- D.
The large debtholder expropriating the minority debtholders.
Correct Answer
C. The shareholders expropriating the debtholders.Explanation
The agency problem of debt refers to conflicts of interest between shareholders and debtholders in a company. In this case, the correct answer suggests that the shareholders are expropriating the debtholders. This means that the shareholders, who have a controlling stake in the company, are taking advantage of their position to benefit themselves at the expense of the debtholders. This can involve actions such as diverting company funds for personal gain or making decisions that prioritize shareholder interests over debtholder interests. Such behavior creates a misalignment of incentives and can lead to financial harm for the debtholders.Rate this question:
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- 4.
Which of the following are examples of agency problems?
- A.
Empire building
- B.
Investing the firm's funds in projects with a negative net present value.
- C.
Managers' on-the-job consumption of shareholder funds.
- D.
All of the above apply.
Correct Answer
D. All of the above apply.Explanation
The given answer, "All of the above apply," is correct because all three options mentioned in the question are examples of agency problems. Empire building refers to managers expanding the firm beyond what is necessary, often for personal gain. Investing in projects with a negative net present value means managers are making poor investment decisions that harm the firm's financial performance. On-the-job consumption of shareholder funds occurs when managers use company resources for personal benefits, which goes against the interests of shareholders. Therefore, all three options demonstrate agency problems.Rate this question:
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- 5.
The following statement about the residual loss is correct.
- A.
There is a residual loss if the monitoring costs exceed the bonding costs.
- B.
The residual loss consists of the loss in firm value caused by the agent not running the firm in the interest of the principal and which cannot be prevented by monitoring and bonding.
- C.
The residual loss is the difference between the monitoring costs and the bonding costs.
- D.
None of the above.
Correct Answer
B. The residual loss consists of the loss in firm value caused by the agent not running the firm in the interest of the principal and which cannot be prevented by monitoring and bonding.Explanation
The correct answer is stating that the residual loss consists of the loss in firm value caused by the agent not running the firm in the interest of the principal and which cannot be prevented by monitoring and bonding. This means that even if monitoring and bonding are in place to ensure the agent's behavior aligns with the principal's interests, there may still be a loss in firm value that cannot be avoided.Rate this question:
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- 6.
The main corporate governance problem outside the UK and the USA is ...
- A.
The principal-agent problem.
- B.
Excessive dividends.
- C.
The expropriation of the minority shareholders by the large, controlling shareholder.
- D.
Hostile takeovers.
Correct Answer
C. The expropriation of the minority shareholders by the large, controlling shareholder.Explanation
The main corporate governance problem outside the UK and the USA is the expropriation of the minority shareholders by the large, controlling shareholder. This refers to the situation where the majority shareholder, who holds a significant portion of the company's shares, takes advantage of their power to benefit themselves at the expense of the minority shareholders. This can include actions such as diverting company resources for personal gain or manipulating the company's financials to reduce the value of minority shareholders' investments. This problem is particularly prevalent in countries with weak legal protections for minority shareholders.Rate this question:
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- 7.
Which one of the following is a benefit of the mutual organisational form?
- A.
The avoidance of conflicts of interests between owners and customers.
- 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.
Correct Answer
A. The avoidance of conflicts of interests between owners and customers.Explanation
The mutual organisational form allows for the avoidance of conflicts of interests between owners and customers. In this type of organization, the owners are also the customers, therefore their interests are aligned. This avoids situations where owners prioritize their own interests over the needs of the customers. By eliminating this conflict, the organization can focus on providing the best products or services to its customers, leading to higher customer satisfaction and loyalty.Rate this question:
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- 8.
Which one of the following statements about evidence from research on German and UK initial public offerings (IPOs) is true?
- A.
UK IPOs end up with fewer new large shareholders six years after the IPO.
- B.
There is a rapid separation of ownership and control in the German IPOs.
- C.
The initial shareholders of German IPOs manage to keep majority control longer than the initial shareholders of UK IPOs.
- D.
None of the above.
Correct Answer
C. The initial shareholders of German IPOs manage to keep majority control longer than the initial shareholders of UK IPOs.Explanation
The research on German and UK initial public offerings (IPOs) suggests that the initial shareholders of German IPOs are able to maintain majority control for a longer period compared to the initial shareholders of UK IPOs. This implies that the ownership structure in German IPOs is more concentrated and the initial shareholders have a greater influence and control over the company's decision-making processes. On the other hand, UK IPOs tend to have a more dispersed ownership structure, resulting in fewer new large shareholders six years after the IPO.Rate this question:
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- 9.
Which one of the following statements is correct?
- A.
German banks assume a much more important role as providers of finance and management support in small- and medium-sized enterprises than in other countries.
- B.
Banks never assumed an important role in the German corporate governance system.
- C.
Germany is not a bank-based system. This is just a myth.
- D.
The German corporate governance system is not any different from the UK or US system in terms of the role of banks.
Correct Answer
A. German banks assume a much more important role as providers of finance and management support in small- and medium-sized enterprises than in other countries.Explanation
German banks play a significant role in providing finance and management support to small- and medium-sized enterprises, more so than banks in other countries. This statement suggests that German banks have a unique and important position in the German corporate governance system, distinguishing it from other systems such as those in the UK or US.Rate this question:
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- 10.
Which one of the following statements about the theory of property rights is true?
- A.
Employees should be given ownership of the firm, if their investments in their human capital are highly specific to the firm.
- B.
Firms should not be in the form of partnerships unless they operate in the financial sector.
- C.
Property rights should always confer more cash flow rights than control rights.
- D.
None of the above.
Correct Answer
A. Employees should be given ownership of the firm, if their investments in their human capital are highly specific to the firm.Explanation
The statement that "Employees should be given ownership of the firm, if their investments in their human capital are highly specific to the firm" is true because it aligns with the theory of property rights. According to this theory, if employees invest their time, skills, and knowledge in a specific firm, they should be given ownership rights as a form of compensation and incentive. This helps to ensure that employees are motivated to contribute their specific human capital to the firm's success and also provides them with a share of the firm's profits.Rate this question:
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- 11.
Which one of the following statements correctly defines demutualisation?
- A.
The demutualisation consists of a mutual building society converting into a stock corporation and floating on the stock exchange.
- B.
This concerns the change in control from the situation where the firm is mutually controlled by many small shareholders to the situation where the firm is controlled by a large shareholder.
- C.
Both of the above are correct.
- D.
None of the above.
Correct Answer
A. The demutualisation consists of a mutual building society converting into a stock corporation and floating on the stock exchange.Explanation
Demutualisation is the process of converting a mutual building society into a stock corporation and making it publicly traded on the stock exchange. This means that the ownership structure changes from being controlled by many small shareholders to being controlled by a large shareholder. Therefore, the correct answer is the first statement: "The demutualisation consists of a mutual building society converting into a stock corporation and floating on the stock exchange."Rate this question:
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- 12.
The ‘quiet life’ hypothesis consists of …
- A.
Employees taking too many holidays.
- B.
Managers avoiding cognitively difficult activities.
- C.
Shareholders retiring from their day jobs to live off the revenues from their investments.
- D.
None of the above.
Correct Answer
B. Managers avoiding cognitively difficult activities.Explanation
The 'quiet life' hypothesis suggests that managers tend to avoid engaging in cognitively difficult activities. This means that they may choose to avoid taking on challenging tasks or responsibilities, preferring instead to stick to easier or less demanding tasks. This hypothesis implies that managers may prioritize their own comfort and convenience over the growth and success of the organization they work for.Rate this question:
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