INSTRUCTOR’S MANUAL

by

Kenneth A. Kim
John R. Nofsinger
&
Derek J. Mohr

for

Corporate Governance, 3rd edition,

Prentice Hall

2010
 CONTENTS

Letter from the authors to instructors……………………………………………………...............3

Ideas to structure the course……..………………………………………………………………...6

Sample syllabi……………………………………………………………………………………..8

Test Bank Questions and Answers

Chapter 1…………………………………………………………………………………………11

Chapter 2…………………………………………………………………………………………13

Chapter 3…………………………………………………………………………………………15

Chapter 4…………………………………………………………………………………………18

Chapter 5…………………………………………………………………………………………21

Chapter 6…………………………………………………………………………………………23

Chapter 7…………………………………………………………………………………………25

Chapter 8…………………………………………………………………………………………27

Chapter 9…………………………………………………………………………………………29

Chapter 10…..……………………………………………………………………………………31

Chapter 11..………………………………………………………………………………………34

Power Point Slides………………………………………………………………………………

37

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 LETTER TO INSTRUCTORS

Welcome to the third edition of Corporate Governance! This manual offers general advice to
instructors and an overview of the textbook, ideas on how this course can be taught, sample
syllabi, a test bank, and copies of PowerPoint slides that come with the second edition. If you
don’t have the slides in electronic version, then you can get them directly from Pearson
Education or by contacting one of us at kk52@buffalo.edu, john_nofsinger@wsu.edu or
dmohr@buffalo.edu. But first, here is some general advice and information about the textbook
and supplementary materials.

Some simple advice: Read the textbook. Each chapter only takes 30-40 minutes to read. This
way, you will be able to use PowerPoint lecture slides with confidence. Even if you have only a
very basic understanding of corporate governance, the textbook’s material will be pretty easy for
you to grasp.

Another piece of advice: Let the students do most of the work. This course primarily should be
an interactive and/or discussion course. Students like to talk. Let them. You can introduce the
material by using the PowerPoint slides, but then afterwards, let the students take over. There
are several ways that students can take over. We have outlined them in these pages. If you
follow our advice, then this should be a really easy course for you to teach, you should get good
teaching evaluations, the students will get a lot out of it, and we are pretty sure that you will also
learn a lot from the students.

About the textbook and its chapters: Each chapter covers a different topic related to corporate
governance. Of all of the corporate governance books out there, ours has the most breadth. We
cover numerous aspects of both internal and external governance. Each chapter is also self-
contained. After the first chapter, you can present chapters in any order that you wish, without
having to worry about disruption to flow.

About the PowerPoint slides: The slides were initially made by graduate students. Then, we
improved on them. Then, we used them ourselves and we improved on them even further.
However, the slides are not thorough in the sense that they do not contain a script for you to read
along to. They merely contain bullet points to jog your memory or to guide your lecture. When
you first see the slides, you might think that they are insufficient to lecture from, but if you read
the chapter before-hand, such as the day before lecture, then you will find that these slides
provide just enough information to facilitate the lecture. As you show the slides, you can simply
read each bullet and then say whatever you want about it. Our personal experience is that each
chapter’s slides take about 35-40 minutes to cover. Alternatively, you could simply have the
students give these lectures (using our slides or having them make their own). We’ve done this
too, and it works well.

About end-of-chapter “Review Questions”: These questions are simple and straight-forward.
They are merely for the students to answer on their own time. No need to touch on them. The
answers to these questions are contained in the chapter. The purpose of these questions is to let
the students know, from the textbook’s point of the view, what the most important facts, ideas,
and concepts are that they were supposed to have gotten from reading the chapter. However,

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these questions are not comprehensive such that knowing their answers does not suggest that
students have mastered the chapter’s materials. You can point this out to the students if you
wish.

About end-of-chapter “Discussion Questions”: There are no “right” answers to these

questions! They are for class discussion. The instructor can serve as moderator. Or, the
instructor can assign individual students to moderate discussion. If you do the latter, then you
should ask the student moderators to come to class prepared (i.e., they should think about the
questions thoroughly before coming to class). You could also assign these Questions as
homework and have students present their answers, and then open it up to the class for debate.
By the way, you will find that these are pretty thought-provoking questions.

About end-of-chapter “Exercises”: These should be done by the students outside of class time
and they should present their work in class. All of the exercises are do-able. Some are time-
consuming, but they are very worthwhile. These exercises are hands-on and they are real-world,
which are what most business school students desire. Students who do these exercises will get a
lot out of them. Students who see these exercises presented by other students will also get a lot
out of them. You will also be exposed to some interesting and useful information as well.

About end-of-chapter “Exercises for Non-U.S. Students”: If you are teaching this class
outside of the U.S., or to international students, then these represent excellent exercises for them
to learn about corporate governance in their own country. Even for classes in the U.S., you and
the students will probably find these exercises useful as well. U.S. students will of course
benefit from learning about corporate governance in different countries.

About the “Test Bank”: We had graduate assistants create most test bank questions (and first
and foremost we thank Karl-Heinz Benning in this regard). The test bank questions have all
been “tested.” Every question that appears in our test bank has been used on our own students
and in using them we also solicited comments on questions as well. We reviewed the students’
comments and have reworded the questions and/or possible answer to eliminate unintentional
ambiguity. However, as with all test banks, some questions may have one or more of the
following elements: (1) there may be more than one correct answer to a question, (2) a choice
that is incorrect may actually be correct under a specific circumstance or contrived condition, (3)
a question may be ambiguous or vague, and (4) a source other than the textbook may suggest a
different correct answer. Our responses to each of these potential criticisms are as follows: (1)
students should choose the one best answer, (2) students should answer the question as it is
asked, as introducing a contrived situation can make almost any wrong answer a correct answer,
(3) some questions are intentionally ambiguous or vague, but the more one studies the less
ambiguous and vague the question will be, and besides, questions with only one obvious correct
choice with all other choices being obviously wrong makes for a childish exam, college students
who read the chapters, actively participated in discussion, and honestly pondered the relevant
issues, should be able to weed through the abstraction of any question and recognize what is the
most correct answer, and (4) students should answer questions based on the textbook readings, as
your adoption of this textbook represents your advocating the book’s viewpoints, unless you
specifically state a contradictory opinion.

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About using outside material to supplement the textbook: Some instructors who have used
our textbook have told us that they sometimes use outside material to supplement our textbook.
There are two ways that this can be done. You can use our textbook to start out with (e.g., from
the first several weeks of class to the first half of the semester), and then use outside material for
the rest of the course. Or, alternatively, you could cover a chapter from our textbook, and then
use outside material to supplement that chapter, and then go on to a next chapter from our
textbook, and again use outside material afterwards, and so forth. By the way, when we say
“outside material” we are referring to academic journal articles. There are a lot of corporate
governance papers freely available on the internet. If you go to www.scholar.google.com and
type in keywords based on the chapter topic, you will find more than enough papers to choose
from. Again, this does not need to be more work for you. You can have the students present the
highlights of these outside materials, and also have the students lead discussions on them. The
sample syllabus describes such a way. Again, everyone, including you, will learn a lot if outside
material is used, as this provides a way for students to get exposed to the contents of many
academic papers in one class. Incidentally, instructors may opt to supplement our textbook with
other corporate governance textbooks.

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 IDEAS TO STRUCTURE THE COURSE

1-credit, 1-week module that meets 3-4 hours per day: For each day, assign one or more
student groups before-hand to present all of the end-of-chapter exercises on the chapters to be
covered for that day. During class sessions, the first half of the session can involve you lecturing
off of our PowerPoint slides. Try to cover 2-3 chapters. Then take a break. Then have the
student groups present their work based on the exercises. You can skip end-of-chapter
discussions. The student deliverables can be their Power Point slides. You can also give them a
comprehensive exam on the last day. A comprehensive exam ensures that students will read all
of the chapters and come to all of the classes, regardless of whether they were assigned to a
particular chapter and presenting on that day.

1.5-credit, 6-week module that meets twice per week: Each class session can cover one
chapter. For each day, assign a student group before-hand to present all of the end-of-chapter
exercises on the chapter to be covered for that day. During the class session, you can start by
lecturing off of our PowerPoint slides. Then, let the student group present their work based on
that chapter’s exercises. If time remains (and we find that time often remains for a 75-80 minute
class, so you might make this mandatory), address some of the end-of-chapter discussion
questions. As with the above, the deliverables can be their PowerPoint slides and a
comprehensive final exam.

3-credit, full semester class that meets twice per week: Each week can cover one chapter.
Again, have student groups present their work based on the chapter’s exercises. However, in
addition to those exercises, have them also pick and prepare at least two exercises for non-U.S.
students. Even if your students are U.S. students, ask them to do research on those exercises
anyway. Tell them that learning about international corporate governance is an important part of
the course. Also fully include the end-of-chapter discussions into the course. The best way to do
all of this is as follows. During the first session of the week, lecture off of our PowerPoint slides
to introduce the chapter. Then, lead class discussion using our end-of-chapter discussion
questions as a guide. For the second session of the week, have the students show their work
from the end-of-chapter exercises. If you are not fully confident that this represents two full
class sessions, then you can try adding a supplemental reading for each chapter and have a
student group present its findings. Or, you can try to cover one and half chapters per week, and
then finish off the semester with supplement readings. Finally, you can also assign individual or
group research projects that either the students or you can choose, and have them present the
highlights of their projects during the last set of weeks. Here, the deliverables include their
PowerPoint slides, a final exam, and also any write-up of supplemental readings or a project. By
the way, in your final exam, you may also wish to include essay questions based on supplement
materials. In our own exam essay questions, we usually ask simple questions on the
supplemental readings, such as “what is the main point of this paper?,” simply to make sure that
it was read.

A sample syllabus: On the following pages is a syllabus that one of us used to teach a one-week
module on corporate governance. In fact, the structure of the course is a bit different from what
is suggested above, and thus represents a different idea of how to teach it. You will note that the

6
module focuses on international corporate governance. Therefore, the supplemental readings
used in that module all have an international focus.

7
 SAMPLE SYLLABUS

Module on International Corporate Governance

Background:

When the internet bubble burst and when numerous accounting scandals (e.g., WorldCom,
Enron, Parmalat, etc.) came to light, the markets crashed and countries around the world issued
new or revised corporate governance codes, including the U.S. (e.g., Sarbanes-Oxley Act). This
module deals with one of the most important financial issues of our times: corporate governance.

Course Objectives:

Upon completion of this module, students will know and understand the key issues and players
involved in corporate governance. Students will also gain an appreciation of how corporate
governance issues are complicated. Finally, students will also be exposed to the latest global
issues with regard to corporate governance.

Grading:

20% Group Presentation #1

20% Group Presentation #2
20% Comprehensive Final Exam
20% Peer Evaluation from Group Members
20% Quality of Participation when NOT Presenting

Required Readings:

- Kim and Nofsinger, 2007, Corporate Governance, 2nd edition, Prentice Hall.
- Academic journal articles listed below.

Course Strategy:

I will lecture on Monday. My lecture will be based on Kim and Nofsinger’s textbook. On
Tuesday and Wednesday, students will make group presentations using PowerPoint. Finally, a
final exam will be administered on the last day.

For the team-based presentations, I have created teams of 3 students. Team members will be
announced one week prior to our module.

Final Exam:

The final exam is cumulative. It contains true/false questions and multiple-choice questions.
There are also short essay questions based on supplemental readings. The purpose of the exam is
to make sure you did all of the readings, even those readings that you were not assigned to
present.

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Detailed Course Outline:

Day 1: Lecture

Readings: Kim and Nofsinger textbook.

Important Notes: I will lecture to kick off the module. My lecture will be based on the Kim and
Nofsinger book. In fact, my lecture on Monday will cover the entire book.

Day 2: Student presentations

Readings: Kim and Nofsinger textbook.

Important Notes: Each team is assigned to a specific chapter. Teams must do and present the
“Exercises” in their assigned chapter. Exercises can be found at the end of each chapter. Then,
those same teams are expected to lead class discussions on their chapter. “Discussion
Questions” are also found at the end of each chapter. In your presentations, please also try to
identify one or more questions from the “Exercises for Non-U.S. Students” for presentation and
discussion. A formal write-up is NOT due. I only require a hardcopy of the PowerPoint
presentation. The following teams will present “Exercises” and lead “Discussions” for the
following chapters.

Team #1 Chapter 2: Executive Incentives

Team #2 Chapter 3: Accountants and Auditors
Team #3 Chapter 4: Boards of Directors
Team #4 Chapter 5: I-Banks and Analysts
Team #5 Chapter 6: Creditors and Credit Rating Agencies
Team #6 Chapter 7: Shareholders and Activism
Team #7 Chapter 8: Takeovers
Team #8: Chapter 9: SEC

Day 3: Student presentations

Readings: Kim and Nofsinger textbook, and additional readings (see below).

Important Notes: Each team is assigned to a specific Kim and Nofsinger book chapter, OR
academic paper. For those teams assigned to a book chapter, please follow the procedures above
for your presentations. For those teams assigned to an academic paper, please use the following
guidelines for your presentation. First, please tell us the overall big picture point of the paper.
Second, tell how us how the paper plans to get its point across. Third, tell us what the paper
empirically does/finds. Finally, in your opinion, tell us what we should do given what the article
says (after all, if an academic paper has no practical use or value, then good is it?). Tip: Here is a
useful tip for those presenting academic articles. Reading academic economics and finance
papers is not as hard as you might think. There is a trick to it. The point of the paper and how
the paper will try to get its point across are both usually covered in the introduction. Then, you
can pretty much use the tables to point out what the paper does. The key results are usually in a

9
few tables. See if you can identify those key tables and present the key findings in them. For
teams presenting academic papers, you do not have to lead discussion on those papers.

Team #1 Chapter 10: New Rules

Team #2 Chapter 11: Citizenship
Team #3 Article 1: Law and Finance
Team #4 Article 2: Investor Protection and Firm Value
Team #5 Article 3: Insider Trading Laws
Team #6 Article 4: What Works in Securities Laws?
Team #7 Article 5: Country Characteristics and Governance
Team #8 Article 6: To Steal or Not to Steal
Instructor Article 7: Shareholder Rights and Boards

Article #1
LaPorta, R., F. Lopez-de-Silanes, A. Shleifer, and R. Vishny, 1998, Law and finance, Journal of
Political Economy 106, 1113-1155.

Article #2
LaPorta, R., F. Lopez-de-Silanes, and A. Shleifer, 2002, Investor protection and corporate
valuation, Journal of Finance 57, 1147-1169.

Article #3
Beny, L.N., 2007, Insider trading laws and stock markets around the world: An empirical
contribution to the theoretical law and economics debate, Journal of Corporation Law,
forthcoming.

Article #4
LaPorta, R., F. Lopez-de-Silanes, and A. Shleifer, 2006, What works in securities laws?, Journal
of Finance 61, 1-32.

Article #5
Doidge, C., G. Karolyi, and R. Stulz, 2006, Why do country characteristics matter so much for
corporate governance?, Journal of Financial Economics, forthcoming.

Article #6
Durnev, A. and E. Kim, 2005, To steal or not to steal: Firm attributes, legal environment, and
valuation, Journal of Finance 60, 1461-1493.

Article #7
Kim, K.A., P. Kitsabunnarat, and J. Nofsinger, 2007, Large shareholders, board independence,
and minority shareholder rights: Evidence from Europe, SUNY-Buffalo working paper

Day #4

Wrap-up and Comprehensive Final Exam

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 TEST BANK

Correct answers for True/False questions are denoted with a T or F. Correct answers to multiple-
choice question are in bold.

Chapter 1: Corporations and Corporate Governance

True / False Questions

F Capitalism is an economic system of business based on public enterprise.

T The main goal of a company is to create an environment conducive to earning long-term

profits.

F The owners of corporations act as agents for the firm and bear unlimited personal
liability.

T Solutions to the principal-agent problem are incentives and monitoring.

Multiple Choice Questions

In general, basic forms of business can be ___.

a. a sole proprietorship
b. a partnership
c. a corporation
d. All of the above.
e. None of the above.

The principal-agent problem can be described as:

a. Managers will always try to pursue enough profits to keep stockholders satisfied.
b. The owner acts as the agent of the firm and the manager is the principal who controls
the firm.
c. If shareholders cannot effectively monitor the managers’ behavior, managers may
be tempted to use the firm’s assets for their own ends.
d. All of the above
e. None of the above.

According to Chapter 1, monitoring groups outside of the company can be all EXCEPT
a. Auditors
b. Board of Directors
c. Investment analysts
d. All of the above are outside monitors.
e. Both a and b.

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Which is perhaps the most important advantage of the corporate business form?
a. Easy to start up.
b. Double taxation for shareholders can be avoided.
c. Running a corporation is usually not very expensive.
d. Access to the capital market.
e. None of the above is an important advantage.

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 Chapter 2: Executive Incentives

True / False Questions

F The base salary of a CEO is solely based on characteristics of the CEO (e.g. age,
experience).

T One advantage of awarding bonuses as opposed to giving raises, is that bonuses are one
time rewards for realized performance.

T Performance stock is common stock of the company given to the executives only if
certain performance criteria are met.

T If the stock price is underwater, options lose their effectiveness to motivate a CEO.

F If a manager receives incentives, then the company will perform well.

T Restricted stock usually requires a certain amount of time to pass before becoming
unrestricted.

F The character of the CEO is really what drives the basis for their pay.

T Xerox admitted to the SEC that it had improperly recorded earnings and agreed to pay a
$10 million fine

Multiple Choice Questions

Typically, on which accounting profit measures are cash bonuses for CEO’s based on?
a. Earnings per share.
b. Earnings before interest and taxes.
c. Economic value added.
d. All of the above.
e. None of the above.

What does expensing executives options mean?

a. Cost of stock options issued to executives should be treated as an expense on the
firm’s financial statements.
b. Under the Sarbanes-Oxley Act, the firm has to pay an extra fee for issuing stock
options to executives.
c. Under new FASB regulations, the value of granted options must no longer be deducted
from the firm’s reported income.
d. Both a and b.
e. None of the above.

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Beyond incentives and monitoring, what could be a third way to align managers’ behavior with
shareholders interests?
a. Develop strong industry standards for executives’ work ethics.
b. Increase penalties for managers who intentionally mislead shareholders.
c. Consult all shareholders on the operational decisions of executives.
d. Ask managers to behave more like shareholders.
e. None of the above. There is no third way.

Regarding the stock market, one problem with using stock options as incentives is:
a. The transaction costs for CEOs to sell their options are relatively high.
b. CEOs are only allowed to exercise their options when the stock price of the company
is equal to the strike price.
c. Executives only have partial influence on their firm’s stock price.
d. Typically, stock options expire after 2 years and therefore are short-term incentives.
e. There are no problems with using stock options to incent executives.

Which country offers the largest portion of executive pay as variable (incentive) pay?
a. United States
b. Spain
c. India
d. Sweden
e. Narnia

Why might a firm’s Board re-price the executive stock options?

a. To demonstrate forgiveness.
b. To keep executives with the firm.
c. To improve the stock price by getting more shares into the market.
d. To make the owner’s profit bigger after an important accomplishment.
e. Firms do not re-price executive stock options.

Problems with stock options include all EXCEPT:

a. A CEO might forego increasing dividends to use the cash to try and increase the stock
price.
b. CEOs accept riskier projects because that usually causes the stock price to increase.
c. Option payoffs are closely related to the performance of the overall stock market.
d. CEOs will work hard to increase the stock price when they receive stock options.
e. There are no problems with using stock options to incent CEOs.

When must a CEO repay their loans from their corporation?

a. Within one year.
b. When they achieve a goal.
c. They often never do.
d. Upon retirement.
e. Upon being fired.

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 Chapter 3: Accountants and Auditors

True / False Questions

F When IRS tax forms are being completed, choices are made to maximize earnings in
order to drive up the firm’s stock price.

T Financial Accounting provides information for outsiders.

T Firms are not required to have internal auditors.

T Today, accounting departments are considered as being profit centers with the task of
increasing profits through application of accounting methods.

T Auditors review private financial information for mistakes and other problems that may
occur with accounting.

T Fraud occurs when a firm intentionally pushes their accounting applications beyond the
intent of GAAP.

F GAAP stands for Generally Accepted Accounting Practices.

F The American Institute for Certified Public Accountants (AICPA) no longer exists
because of the creation of the Public Company Accounting Oversight Board (PCAOB).

T Board Members of the Financial Accounting Standards Board must divest all ties with
former employers before taking office.

T The Financial Accounting Standards Board (FASB) sets the standards for the Generally
Accepted Accounting Principles (GAAP) commonly used in the USA.

Multiple Choice Questions

External Auditors may do all the following EXCEPT:

a. Confirm with the firm’s customers and clients to confirm accuracy of short-term assets
and liabilities.
b. Provide both auditing and consulting activities to the same company.
c. Conduct interviews with the firm’s employees to asses the quality of the internal audit
system.
d. External auditors may do all of the above.
e. Both a and b.

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Problem(s) that may occur with accounting are/is:
a. Intentional fraud by manager or accountant.
b. Information provided by financial accounting could leak out to the public.
c. Potential problems when judgments are required.
d. Both a and c.
e. None of the above.

In a recent study, _____ was found to have the best legal environment to discourage earnings
manipulation:
a. U.K.
b. Germany
c. Canada
d. USA
e. Narnia

A high-quality accounting system requires:

a. Ambiguous accounting standards to allow managing earnings within legal boundaries.
b. Implementing many shareholder rights and protection of those rights.
c. Non governmental institutions to encourage smoothing of earnings to reduce
shareholder’s risk.
d. Both a and b.
e. None of the above.

The development of information for insiders, such as company executives, is called:

a. Financial Accounting
b. Management Accounting
c. A Balancing Act
d. Income Statement Accounting
e. Bean Counting

The practice of smoothing earnings over time

a. gives shareholders a sense of reduced risk in the firm.
b. detects fraud.
c. ensures compliance with accounting regulations.
d. is illegal.
e. is encouraged by the IRS.

A relationship between a firm’s auditors and its consultants can be a problem because:
a. Auditors may be pressured to overlook borderline practices.
b. Responsibility of effective monitoring is hindered because their bonuses depend on
how much money the consulting group earns for the accounting firm.
c. There is a conflict of interest for auditors.
d. All of the above.
e. None of the above.

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The Sarbanes-Oxley Act of 2002 authorized the creation of this organization to oversee audits:
a. Financial Accounting Standards Board (FASB)
b. American Institute for Certified Public Accountants (AICPA)
c. Public Company Accounting Oversight Board (PCAOB)
d. International Accounting Standards Board (IASB)
e. Sarbanes-Oxley Oversight Board (SOXOB)

17
 Chapter 4: The Board of Directors

True / False Questions

F Federal law explicitly dictates that public corporations must have a board of directors.

T To vote on major operating decisions is one of the five board functions.

F A director is not independent if he (or immediate family) has worked for the company or
its auditor within the last 10 years.

T According to NYSE standards, the audit committee has increased authority and
responsibility to hire and fire the auditing firm.

F According to research, larger boards are more likely to act independent and therefore are
more effectively at enhancing a firm’s value than smaller boards.

T Some European countries have firms with a two-tier board structure.

F The lack of CEOs serving as Board Directors by America’s top companies is evidence
that the practice should be avoided.

T A young growth-oriented firm may actually need more insiders on its Board of Directors.

Multiple Choice Questions

Because directors are supposed to represent shareholders’ interests, directors have all these
duties EXCEPT:
a. Fiduciary duty
b. Duty of care
c. Duty of auditing
d. Duty of loyalty and fair dealing
e. Directors have all of the above duties.

Reason(s) for increased attention to the board of directors are/is:

a. Increased activity in mergers and acquisitions.
b. SEC rules regulating disclosures from corporations with regard to executive
compensations from 1992.
c. SEC rules in 1992, making communication between shareholders easier.
d. All of the above.
e. Both b and c.

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It is beneficial for the shareholders if the Board of Directors
a. has some independent board members.
b. has a famous figurehead on the board.
c. own none of the company’s stock.
d. Both b and c.
e. None of the above.

Generally, what can be said about the structure of boards?

a. The more directors, the better the firm’s financial performance will be.
b. All the Fortune-listed firms have an independent chairman of the board.
c. In regards to board composition, it is important to identify which specific board
committees are best served by independent directors.
d. There is little controversy about what defines the best board structure.
e. All of the above.

Even if the CEO is not the chairman of the board, s/he is not necessarily under a more careful
watch. Why not?
a. Directors do not have a significant vested interest in the firm.
b. CEO leads the compensation committee and therefore controls the compensation of the
chairman too.
c. Outside board members might still have some sort of business or personal tie to the
CEO.
d. All of the above.
e. Both a and c.

In the summer of 2002, what legislation increased the monitoring ability and responsibilities of
American board directors?
a. Securities and Exchange Commission Act
b. Sarbanes-Oxley Act
c. Corporate Securities Act
d. Board of Directors Act
e. Act of Nature

The primary responsibilities of a Board of Directors include:

a. Evaluating the CEO.
b. Determining CEO compensation.
c. Providing expert advice to the CEO.
d. All of the above.
e. Both a and c.

Which of the following is NOT a common board committee?

a. audit committee
b. nomination committee
c. marketing committee
d. compensation committee
e. All of the above are common board committees.

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Board members are chosen by:
a. Being related to a member of the board
b. A vote by all employees
c. A vote of the shareholders
d. Promotion within the company
e. An appointment by the executive committee

20
 Chapter 5: Investment Banks and Securities Analysts

True / False Questions

F Due to the higher risk for the investment bank, fees for seasoned equity offerings (SEO)
are usually higher than for initial public offerings (IPO).

T As demand for technology firms dramatically increased in the mid- to late-1990s,

investment banks began to bring inferior companies to the market as the risk for
underwriting these firms did not seem very high with such strong demand.

T In the best-efforts method, the investment bank does not guarantee that the firm will get
its desired amount of capital.

F Average first-day returns for IPOs have been negative each year since 1980, because
investment banks usually sell at a slightly higher price to compensate for risks from
underwriting the issues.

T In the underwriting method of issuing stock and bonds, the investment bank will
guarantee a specific amount of capital.

F Sell-side analysts typically work at mutual funds and pension funds.

F Most firms that wish to go public eventually do.

F The term “Chinese Wall” refers to economic conflict between US and China.

Multiple Choice Questions

The following is/are methods an investment bank can use to issue stocks and bonds:
a. Underwriting an issue
b. Best-effort method
c. Auction method
d. All of the above.
e. Both a and b.

The prospectus submitted to the SEC in order to sell securities to the public details all of the
following EXCEPT:
a. Company’s financial condition
b. Company’s daily stock price over the last two years
c. Management experience
d. All of the above are included in the prospectus.
e. Both b and c.

21
Traditional roles of the analysts are to conduct analyses of their assigned firm in order to:
a. Make trading recommendations
b. Make earnings estimates
c. Underwrite issues
d. All of the above.
e. Both a and b.

With regard to predicting earnings, analysts’ predictions tend to be

a. optimistic, in order to set a goal for the company’s management that would lead to an
increase in shareholder value.
b. conservative, given the industry game of “Under promise, over deliver”.
c. optimistic, given the industry game of “Under promise, over deliver.”
d. conservative, given the industry game of “Over promise, under deliver.”
e. Both a and c.

Why are investment banks and securities analysts a part of the governance system?
a. Investment banks evaluate a firm while helping them to access new capital
b. Investors frequently possess better information than most analysts about a firm
c. Both investment bank and analysts are in a good position to monitor the firm and to
identify problems for shareholders
d. All of the above.
e. Both a and c.

Which of the choices below is a benefit of the Regulation Fair Disclosure rule?
a. It makes analysts jobs easier
b. It creates a level playing field for investors
c. It creates a three-tier rating system to eliminate ambiguity
d. It prevents privileged information from being made public
e. None of the above.

Which one of these is NOT a traditional method of obtaining capital?

a. Issuing stock
b. Issuing bonds
c. Structured Deals
d. Borrowing from banks
e. All of the above are traditional methods of obtaining capital.

In 2003 SEC settlement that resulted in $1.4 billion between Merrill Lynch and nine other firms
is referred to as:
a. National Research Settlement
b. Global Analyst Research Settlement
c. Investment Banking Massacre
d. Global Securities Analysts Settlement
e. None of the above.

22
 Chapter 6: Creditors and Credit Rating Agencies

True / False Questions

F In general, there are two kinds of lenders, institutional lenders such as commercial banks
and stockholders.

F Firms with a lot of debt offer their managers greater flexibility to make value enhancing
capital expenditures when opportunities “suddenly” arise.

T In order to get favorable interest rates, a firm may have to reveal intimate details of its
projects and agree to numerous covenants.

T In reality, creditors are lending to stockholders, thus putting them on opposing sides of
the credit claim.

T A firm’s creditors and stockholders are often both viewed as investors.

T Credit rating agencies are exempt from disclosure rules, meaning they do not need to
reveal non-public or sensitive information.

T Considering creditor protection legal systems, the English legal system is based on
common law, whereas the Scandinavian legal systems are based on civil law.

Multiple Choice Questions

The existence of corporate debt creates the following important corporate system monitor(s) or
device(s):
a. Monitoring by institutional lenders.
b. Debt can be a disciplinary mechanism.
c. Monitoring and debt ratings by credit agencies.
d. All of the above.
e. Both a and c.

Relationship banking might be beneficial to the borrowing firm because:

a. By dealing with only one lender, the firm avoids the danger of losing too much power
to disperse, numerous lenders.
b. It is easier for the firm to enforce covenants.
c. Firms may find it easier to renegotiate with a single lender than with disperse
lenders.
d. Both a and c.
e. None of the above.

23
Which of the following is true about creditors and stockholders?
a. Stockholders are entitled to the firm’s net income before creditors get their interest
payment.
b. Because creditors get their return first, they may have less incentive to monitor
managerial behavior than stockholders.
c. Under extreme circumstances (e.g., a firm cannot make its interest payments), creditors
cannot enforce the firm to liquidate its assets.
d. An individual cannot be both a creditor and a stockholder.
e. Both b and c.

Generally, which of the following is true?

a. Creditor rights are usually less explicit than shareholder rights.
b.Bondholders are primarily willing to take risk.
c. Credit rating agencies rate bonds for potential investors.
d. All of the above.
e. None of the above.

Bond covenants:
a. Are rules, promises, and/or restrictions that the borrower agrees to adhere to.
b. Are written into debt contracts.
c. Can lead to a transfer of firm control from management to creditors.
d. All of the above.
e. Both b and c.

Which investor would get first claim on the assets of a company that is struggling financially?
a. Common Stock Investors
b. Preferred Stock Investors
c. Bond Investors
d. The investor that acts fastest.
e. No one would, the company would be bankrupt

Which bond is rated the highest according to Moody’s ratings system?

a. Caa
b. B
c. Aa
d. A
e. Baa

Considering credit protection legal systems, the following countries belong to the English legal
system EXCEPT
a. Canada
b. South Africa
c. Thailand
d. Japan
e. United Kingdom

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 Chapter 7: Shareholders and Shareholder Activism

True / False Questions

T “Wall Street walk” is a common expression for individual shareholders whose only
activity is selling shares they are unhappy with.

F Individual shareholders, large shareholders, and institutional shareholders are mutually

exclusive categories of shareholders.

F Today, anyone owning more than $5,000 or 1% of a firms stock on a continuous basis for
at least 2 years is able to submit a proposal to be considered and voted on at a
shareholders’ meeting.

F Proxy fights to change directors are an easy and cheap way for shareholders to change
directors at their firm.

T Most shareholder proposals submitted by individual investors do not pass, especially

those that go against management desires.

F If managers waste company assets for personal use, shareholders are. not permitted to use
the legal system to sue the managers.

T Public firms in the U.S. and the U.K. have the most dispersed ownership structures in the
world.

T An institutional shareholder is usually a large percentage shareholder of a firm.

T_____In a "derivative" lawsuit, the shareholders file a claim on behalf of the company and any
recovery from managers or directors is paid to the company not to the shareholders.

F Shareholder activism is always a good way to predict good firm performance.

T Pension funds tried to influence the firm by targeting the poor corporate performers and
pushing them to reform.

Multiple Choice Questions

Which is/are (a) roadblock(s) regarding effective shareholder activism?

a. Short-term view of investors.
b. Conflict of interests by private fund advisors, hired by corporate executives to manage
pension assets.
c. Under the Investment Company Act, mutual funds that own more than 10% of any one
company must face additional regulatory and tax burdens.
d. All of the above.
e. None of the above.

25
Why are some pension funds increasing their shareholder activism?
a. Pension funds have fewer restrictions compared to mutual funds, on how much of a
firm they can own.
b. Pension funds have increased their ownership stake of U.S. equities.
c. Pension funds have a fiduciary responsibility to their plan participants.
d. All of the above.
e. Both b and c.

What can be considered as shareholder activism?

a. Writing a letter to management regarding some aspect of the firm’s operations.
b. Shareholders expressing their opinions to try to influence a firm.
c. Shareholders submitting governance-oriented shareholder proposals.
d. All of the above.
e. Both a and b.

Which type of institutional investor is the most active in monitoring the firm?
a. Mutual Funds
b. Pension Funds
c. Insurance Company
d. Bank trusts
e. Venture Capitalists

Around the world, the two most common types of large shareholders that actively participate in
management are
a. Family-Owners and State-Owners
b. Individual and Institutional
c. Individual and Family-Owners
d. Individual and State-Owners
e. Institutional and State-Owners

Which of the following makes shareholder activism effective?

a. Activists having a short-term view.
b. Selling shares rather than changing the company.
c. Legal regulations
d. Companies that don’t listen to activists
e. None of the above.

26
 Chapter 8: Corporate Takeovers: A Governance Mechanism?

True / False Questions

T Hostile takeovers which represent one process in which “bad” management can be
eliminated once their firms are taken over are known as “disciplinary takeovers”.

F “Empire building” describes a vertical merger with or acquisition of one of the firm’s
suppliers.

F Most of the time the “target” firm will enjoy a share price decrease when its acquisition is
announced to the public.

T The target firm’s management team may oppose being acquired although the target firm’s
shareholders might like it when their firm is taken.

T A poison pill is any strategy that makes a target firm less attractive immediately after it is
taken over.

T M & A stands for mergers and acquisitions.

T The US and the UK have the most anti-takeover laws in the world.

Multiple Choice Questions

The following is true about poison pills EXCEPT:

a. A popularly used poison pill gives the target firm’s shareholders the right to buy the
acquirer’s stock for a deep discount if its firm is acquired.
b. Only a small fraction of the S&P500 firms have a poison pill.
c. Another form of a poison pill is a firm’s debt becoming immediately due once it is
taken over.
d. All of the above is true.
e. All of the above is false.

Form(s) of firm-level reactionary takeover defense(s) against unwanted takeovers is/are:

a. Greenmail
b. Find a white knight, who will not fire management after takeover.
c. Find an investor to buy enough shares to block the acquisition (also called white
squire).
d. All of the above.
e. Both a and c.

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What is TRUE about state-level anti-takeover laws?
a. Freeze-out laws stipulate a length of time that a bidder that takes control has to wait to
merge the target with its own assets.
b. Fair price laws make sure that the acquirer buys the target at a reasonable premium.
c. A constituency statue allows managers to include non-shareholders’ interests in
defending against takeovers.
d. All of the above.
e. Both a and c.

Why can’t we rely on takeovers as efficient contributor to the corporate governance system?
a. Some anti-take-over defenses benefit only managers (e.g. golden parachute).
b. Takeovers could occur for the wrong reason (e.g. empire building).
c. The acquirer may have to pay too much for a target.
d. All of the above.
e. Both b and c.

An automatic payment made to managers if their firm gets taken over is referred to as:
a. Supermajority Rules
b. A Golden Parachute
c. Staggered Boards
d. Greenmail
e. A Soft Landing

Companies choose to use mergers and acquisitions for which of the following reasons:
a. Growth
b. Synergy
c. Diversification
d. All of the above.
e. None of the above.

Corporate raiders were most known for disciplinary takeovers during the:
a. 1960s
b. 1970s
c. 1980s
d. 1990s
e. 2000s

Which of the following is NOT true regarding M & As in Asia:

a. Asian countries have their own unique circumstances that make M&A’s difficult.
b. Corporations tend to cross own each other.
c. There are few restrictions preventing foreign acquires to take over Asian firms.
d. Relative to the US, few M&As occur in Asian countries.
e. All of the above are true.

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 Chapter 9: The Securities and Exchange Commission and Sarbanes-Oxley

True / False Questions

T Since March 2004, the SEC requires 8-Ks to be filed within 4, instead of the previous 5
to 15, business days after the triggering event.

F A reduction of the deadline after close of the fiscal year for the filing of annual reports
might increase the accuracy with which companies compile reports.

T As it is often the company that gets fined by the SEC, ultimately those fines are paid by
the shareholders because it comes out of the companies profits.

F The SEC can file criminal charges.

T SEC commissioners must be appointed by the President and confirmed by the Senate.

F The Sarbanes-Oxley Act created a new oversight body to regulate auditors, and reduced
punishments for corporate white-collar crime which in the end innocent shareholders
would have to pay for.

T The penalties for committing a white-collar crime were generally increased from a
maximum of 5 years imprisonment to 20 years.

F Sarbanes-Oxley encourages a firm to provide both auditing and consulting activities for
the same firm.

Multiple Choice Questions

Important forms to file with the SEC are:

a. The Form S-1 is the most common securities registration form.
b. The 10-Ks are the annual reports public corporations are required to submit under the
Security Exchange Act of 1934.
c. In addition to the periodic filings, the firm must submit 10-Qs to update any forms if
significant changes take place.
d. All of the above.
e. Both a and b.

The following is true about the Division of Enforcement, EXCEPT:

a. Each year the SEC prosecutes between 4,000 and 5,000 individuals and
companies.
b. Most prosecutions are settled out of court.
c. Violations mainly involve accounting fraud, insider trading, and deception regarding
securities.
d. All of the above are true.
e. Both b and c are not true.

29
Critical point(s) regarding the SEC is/are:
a. The costs of reporting and following SEC regulations can be tremendous.
b. The pay of SEC attorneys and examiners are estimated as being as much as 40%
higher than their peers at comparable federal agencies.
c. Empirically it is proven, that the existence of the SEC had no influence on the
occurrences of securities fraud.
d. All of the above.
e. Both a and c.

Which of the following is not one of the four divisions of the SEC?
a. Division of Corporation Finance
b. Division of Securities Regulation
c. Division of Enforcement
d. Division of Trading and Markets
e. Division of Investment Management

Which of the following is not a problem area of the SEC?

a. Reporting
b. Employee Turnover
c. Punishment
d. Market Efficiency
e. Resources

Which is/are one/or more of the duties of the Public Accounting Oversight Board?
a. Register public corporations when issuing IPO
b. Register public accounting firms
c. Oversee the budget and manage the operations of the SEC
d. All of the above
e. Both a and b.

Sarbanes-Oxley tries to ensure auditor independence. How?

a. Gives the executive committee of the firm’s board more authority over auditing
activities.
b. Forces the lead audit partner in an audit team to change at least every ten years.
c. Disallows auditing by an accounting firm if any of the top executives of the public
company were employed by the accounting firm within the past year.
d. Both a and c.
e. Both b and c.

30
Sarbanes-Oxley tries to increase the monitoring ability and responsibility of boards of directors.
How?
a. Makes the audit committee more independent from management and more responsible
for the negotiating and hiring of new top executives.
b. Forces executives of the firm to forfeit any profit from bonus or stock sales
resulting in earnings that needed to be restated as a result of misconduct.
c. Forces external auditors to certify the appropriateness of the financial statements filed
with the SEC.
d. All of the above.
e. Both b and c.

Sarbanes-Oxley tries to make executives’ decisions more transparent to shareholders. How?

a. Sarbanes-Oxley requires disclosure of “off-balance sheet transactions”.
b. It prohibits the lending of money by the public companies to executives, except for the
use of home loans.
c. It increases the time an executive has to report company stock trades to the SEC.
d. All of the above.
e. Both a and b.

Is the Sarbanes-Oxley Act a success or a failure? Which of the following answers illustrate how
difficult it is to determine the Act’s level of success?
a. We don’t know how much fraud would have been committed had the Act not been
passed.
b. We can’t easily attribute any increase in investor confidence directly to the Act.
c. We can’t reliably associate any increase in the firm’s value as a result of the Act.
d. All of the above.
e. None of the above.

Which government entity oversees the Public Company Accounting Oversight Board?
a. Federal Trade Commission (FTC)
b. Department of Treasury
c. Securities Exchange Commission (SEC)
d. Federal Reserve Bank
e. None of the above.

All of these are characteristics of the NYSE except:

a. Companies have a majority of independent directors.
b. Nominating committee of the board must be composed entirely of independent
directors.
c. Committee will have an increased authority and responsibility to hire and fire the
auditing firm.
d. All are characteristics of the NYSE.
e. None are characteristics of the NYSE.

31
 Chapter 10: Systemic Risk, Moral Hazard & Bailouts

True / False Questions

F Systemic risk describes risk that an audit system will not pick up fraud within a firm.

T Government bailouts are motivated by the concern that the economy will be severely
affected if critically important firms are permitted to fail.

F Bailouts are common features of government because they avoid any adverse incentive
effects.

T Moral Hazard and compensation contracts that reward large profits with bonuses both
give executives similar incentives to increase risk.

F Investment banks made similar decisions with respect to betting the firms existence on a
single sector of the economy when they were partnerships as when they were publicly
traded corporations.

F Managers of U.S. auto companies could not have known in 2008 that gas prices could
increase suddenly leaving them unable to sell their lineup of gas guzzling vehicles.

T The collapse of Iceland's financial market and economy in 2008 show that the concern
over the "domino effect" in financial markets is a concern that should be taken seriously.

Multiple Choice Questions

Which of the following was not bailed out by the U.S. government in the financial crisis of 2007-
2009?
a. Citigroup
b. Lehman Brothers
c. AIG
d. All of the above
e. Both a and b.

Moral Hazard changes managers' incentives to take risks. How?

a. Managers are more likely to be careful in decisions if they have to be moral.
b. Managers are more likely to take high risks because managers will only be penalized
for actions they could have controlled.
c. Managers are more likely to take high risks because managers will earn the
benefits of good results while the government will step in if there are bad results.
d. Both a and c.
e. Both b and c.

How can the financial crisis of 2007-2009 be explained as a failure of corporate governance?

32
 a. Managers made decisions as shareholders would have wanted and this caused the
managers to take risky positions.
b. Managers loaded up on risk in the mortgage business because the large fees they
earned from that sector earned them record bonuses.
c. The interconnectedness of the world financial markets.
d. All of the above.
e. Both a and b.

Credit default swaps (CDS) contracts increased the systemic risk of banks. How?
a. CDS contracts allowed banks to buy "insurance" offsetting the risk of loans they made,
which allowed them to turn around and make new loans.
b. CDS contracts tied together financial firms as large firms like AIG promised to cover
defaulting debt for large banks like Citi.
c. CDS contracts reduced the impact of a failed loan for a bank.
d. All of the above.
e. Both a and b.

What was the primary motivation for the Federal Reserve and U.S. Treasury in spending more
than a trillion dollars to bailout firms in the fall of 2008?
a. They were rewarding campaign contributors.
b. They were trying to avoid a financial collapse that would lead to another Great
Depression.
c. They were trying to reduce moral hazard.
d. All of the above.
e. None of the above.

All of the following are government bailouts except:

a. Airline industry in 2001 following the 9/11 attack.
b. U.S. auto industry in 1979-1981 after spike in gas prices made large cars unpopular.
c. Long Term Capital Management (LTCM) in 1998.
d. All of the above.
e. None of the above.

What does TARP stand for in the $700 billion program enacted in the fall of 2008?
a. Total Assistance Remedy Program
b. Top Assets Refurbish Program
c. Troubled Asset Relief Program
d. Total Above Review Program
e. None of the above.

33
Chaptear 11: Corporate Citizenship

True / False Questions

F Stakeholders are defined by what kind of interest the company has in them.

T Many companies have an organizational unit tasked with communicating with

shareholders.

F As Wal-Mart is the largest corporate cash contributor to charity with $170 million, we
can say that Wal-Mart is doing a good job of engaging many of its stakeholders to
optimize their mutual interests.

T The U.S. government, various state governments, and courts have formalized the rights of
stakeholders in Corporations.

T A firm must be efficient and survive over the long term, in order to be useful to society.

T Stakeholder welfare is difficult to measure.

Multiple Choice Questions

Proponents of the Corporate Social Responsibility argue the main drivers of the citizenship trend
include the following:
a. Globalization
b. Pressure from assertive social activists
c. Desire in the capital markets to punish firms not meeting ethical standards
d. All of the above.
e. None of the above.

The following is TRUE about Corporate Social Responsibility, EXCEPT:

a. Social responsibility is a dynamic process.
b. Philanthropy (Level I) is a responsibility that has one of the highest priorities.
c. Failures in higher priority responsibilities cannot be offset through greater participation
in lower priority responsibilities.
d. Both a and c are not true.
e. All of the above is true.

34
The following is TRUE about measuring the welfare of the stakeholders:
a. The “triple bottom line” is the broadly accepted consensus on how to measure
and report changes in stakeholder welfare.
b. The Balanced Scorecard measures performance in four perspectives: customer, internal
processes, employee learning and growth.
c. Accounting measures (like earnings) or market value measures (like stock price) can be
used to identify the impact of past and current managerial decisions on stakeholder
welfare.
d. Both b and c.
e. All of the above is true.

The following is TRUE about the Stakeholder View of the Firm:

a. A stakeholder view of the firm places executives at the center of managing relations
with each stakeholder group.
b. The only way to categorize the different stakeholders is by contractually determined
relationships (primary and secondary stakeholder).
c. Primary stakeholders have limited contractual connection to the firm.
d. All of the above is true.
e. Both a and c.

Stakeholders who are impacted by the firm’s actions but have limited contractual connection to it
are known as:
a. Secondary Stakeholders
b. Primary Stakeholders
c. Contractual Stakeholders
d. All of the above.
e. None of the above.

What are the responsibilities of a firm, with regards to Corporate Social Responsibility? Order
from MOST importance to LEAST importance:
a. Economic, Ethical, Legal, Philanthropy
b. Ethical, Economic, Legal, Philanthropy
c. Economic, Legal, Ethical, Philanthropy
d. Economic, Legal, Philanthropy, Ethical
e. Philanthropy, Economic, Legal, Ethical

Which is NOT a perspective used by proponents of stakeholder theory?

a. Regulative
b. Descriptive
c. Instrumental
d. Normative
e. All of the above are perspectives used by proponents of stakeholder theory.

35