Corporate Governance And Ethics MCQ Questions And Answers

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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."