Practice 12

1. B 2. C 3. D 4. A 5. B 6. D 7. C 8. D 9. B

1. Corporate governance is best defined as:

A) the system of laws and regulations that control corporations.
B) the system of controls, regulations, and incentives designed to prevent
fraud and minimize conflicts of interest in a corporation.
C) the system that determines who controls and runs a corporation.
D) the system that minimizes agency costs between bondholders and
stockholders.

2. Agency costs are best defined as:

A) the costs imposed on a corporation through the laws and regulations
that control corporations.
B) the costs a corporation incurs as the result of fraud.
C) the costs that arise when there are conflicts of interest between a
firm's stakeholders.
D) the costs associated with compensating managers when ownership
and control are separated in a firm.

3. Which of the following is NOT a direct action that can be taken by

shareholders?
A) Submitting shareholder resolutions directing the board to take specific
actions
B) Withholding votes for candidates to the board of directors
C) Initiating a proxy contest
D) Voting to remove the management team

4. Regarding board size, researchers have found that:

A) smaller boards are associated with greater firm value and
performance, since small groups make better decisions than larger
groups.
B) smaller boards are associated with lower firm value and performance,
since small groups are more likely to be compromised by connections
to management.
C) larger boards are associated with greater firm value and performance,
since larger boards tend to have directors with a more diverse range of
 backgrounds and talents.
D) larger boards are associated with lower firm value and performance,
since larger groups are more likely to be compromised by connections
to management.

5. Directors who are not employees, former employees, or family members

of employees and who do not have existing or potential business
relationships with the firm are called:
A) monitoring directors.
B) independent directors.
C) gray directors.
D) inside directors.

6. Backdating refers to:

A) choosing the strike price of a stock option retroactively.
B) choosing the exercise date of the stock option retroactively.
C) choosing the share conversion ratio retroactively.
D) choosing the grant date of a stock option retroactively.

7. The Sarbanes-Oxley Act:

A) prohibits insiders with a fiduciary duty to their shareholders from
trading on material non-public information in that stock.
B) prohibits anyone with nonpublic information about a pending or
ongoing tender offer from trading on that information.
C) overhauls incentive and independence in the auditing process.
D) requires corporations to consider all stakeholders in corporate
governance decisions.

8. Insider trading is BEST described as:

A) when a member of the management team possesses privileged
information.
B) when a member of the management team makes a trade based upon
public information.
C) when any investor makes a trade based upon public information.
D) when any investor makes a trade based upon privileged information.

9. Dual class shares are best defined as:

A) a process where a company issues both common and preferred stock
 to finance the company.
B) a scenario in which companies have more than one class of shares and
one class has superior voting rights over the other class.
C) a scenario in which 51% of the shares are held by a holding company
which is part of a pyramid structure.
D) a process where a company issues shares in two separate countries
each trading on a separate stock exchange.