Corporate Governance quizzes

Quiz 1
1) Which sentence describes the phenomenon of moral hazard?
o After the signing of a contract, the agent has incentives to misbehave.
o The way in which the specific contract is design could attract agents that are more
likely to misbehave.
o Irrespective of the signing of a contract, the agent has incentives to misbehave.
o Before signing the contract, the agent has incentives to misbehave.
2) What are concrete sources that give rise to the "moral hazard" problem?
o It is difficult to anticipate every future contingency in a complete contract.
o The principal cannot observe the manager's effort.
o The principals do not observe the true manager type and therefore his ability.
o The manager knows more than the principal.
o Signals that cannot be verified in a court.
3) Flying in a corporate jet is an example of moral hazard.
o True
o False
4) Please find the correct matches for the three different components of agency costs.
o Monitoring costs: costs associated with keeping track of the manager/agent
o Bonding costs: costs incurred by agent to signal credibility
o Residual loss: Agent may not make decisions to maximize shareholder value
5) Consider a CEO that is very active in M&A. He acquires a lot of new businesses. However, we
observe typically a negative cumulative abnormal return around the days of the acquisition
announcement for the firm's stock. Which of the following examples of moral hazard
are unlikely to cause these negative abnormal returns?
o Lack of transparency
o Self-dealing
o Empire building
o Accounting manipulation
o Insufficient effort
6) An example of Tunneling: Consider a large shareholder X who owns 51% in Firm A and 100%
in Firm B. Assume that X makes Firm A sell machinery to firm B at a price of EUR 4.5 million,
while the current market price of the machine is EUR 5 million.
Calculate the gain for shareholder X from this transaction in thousands of EUR (not EUR
million).
o 245
7) Say you are a large shareholder that wants to engage in tunneling and seeks to leverage the
rents from tunneling. How can you do it?
o Create pyramidal structures.
o Create more fully owned subsidiaries.
o Buy back ownership from minority shareholder.
o Increase stake below 50%.
8) Why is it bad to appoint family members to top management positions?
o Family members might pursue objectives other than shareholder value
maximization.
 o Limiting possible candidates to family members leads to a small candidate pool,
making it less likely to find the best match.
o Appointing family members can lead to selecting poor candidates.
o The family members are less familiar (pun intended) with the business model and
strategic objectives.
o Appointing family members can lead to infighting.

Quiz 2
1) How can the sensitivity of executive pay be estimated empirically?
a. Regress the change in executive wealth on the change in shareholder value,
controlling for potential confounders.
a. Regress executive wealth on shareholder value, while controlling for potential
confounders and year fixed effects.
b. Regress executive wealth on shareholder value, while controlling for potential
confounders.
c. Regress changes in salary on changes in shareholder value, controlling for potential
confounders.
2) What is a typical estimate of the wealth-to-performance sensitivity in US dollars for a US
dollar 1000 increase in shareholder value?
a. 5
b. -10
c. 100
d. 75
3) Which statement describes the skimming theory in Bertrand and Mullanaithan (2001)?
a. CEOs can raise their compensation in good times, as there is less scrutiny by
shareholders.
b. CEO compensation is decoupled from firm operating performance.
c. CEO compensation is strongly tied to the share price, but the CEO has no impact on
the share price.
d. CEOS try to increase the fixed part of their compensation, so they are ensured
against poor performance.
4) Which strategies do Betrand and Mullanaithan (2001) use to estimate the impact of luck on
compensation?
a. They study variation in oil prices as an indicator for luck.
b. They study industries that are exposed to snowfall, assuming that the extent of
snowfall is a random variable thereby capturing luck.
c. They assume that corporate performance is the pure outcome of luck.
d. They exploit fluctuations in exchange rates.
e. Average industry performance is used as a measure of luck external to the firm.
f. They assume that consumer demand randomly fluctuates, which makes it possible to
approximate luck.
5) The figure below shows year-to-year changes in the oil price (grey) and the year-to-year
changes in total executive compensation (blue). The graph below empirically supports the
skimming theory.
a. True
b. False
6) Consider the following regression equation from the paper by Bertrand and Mullanaithan
(2001). Payit =δ + π 1 ^ perf it ∗Govit + μ' x +ε it
perf it + π 2 ^ it

Which combination of π 1(pi1) and π 2(pi2) does the skimming theory imply?

a. pi1 is positive and p2 is negative.
b. p1 is positive and p2 is positive.
c. p1 is negative and p2 is negative.
d. p1 is negative and p2 is positive.
Quiz 3
1) Select all the statements that can be derived from the Figure, which is taken from Crane,
Michenaud and Weston (2016).

- Firms that are in the Russell 2000 and just missed to be in the Russell 1000 have a higher
index weight than firms in the Russell 1000 which just missed to be included in the Russell
2000.
- There are only few very large firms with a very large weight in the Russell index.
- The index weights of firms in the Russell 2000 are on average (equally-weighted, not volume-
weighted) larger than those in the Russell 1000.-weighted)
- There is a discontinuity in the index weight at the rank of 1001.
- Russell firms that are ranked close to the threshold to switch to the Russell 2000 have a
higher index weight than firms in the Russell 2000 that are close to the threshold.
2) The results by Crane, Michenaud and Weston (2016) imply that institutional investors and
dividends are substitutes.
o True
o False
3) Why is it difficult to establish a causal effect of institutional ownership on dividend payout?
o It is difficult to measure institutional ownership.
o Dividends are correlated with confounders that might directly affect ownership by
institutional investors.
o Dividend payouts are fluctuating frequently, which makes them a rather noisy
measure.
o Institutional investors have a preference for payouts, which is why they like to
invest in firms with high existing dividends.
4) Consider the following example of a potential repurchase in advance of earnings
announcements. Can the considered repurchase push the EPS above the analyst consensus?
- Assume analyst consensus EPS of EUR 5.00
- Actual EPS is EUR 4.95
- Share price EUR 100, 1bn shares outstanding
- Yearly interest rate on cash of 4%, 30% tax rate
- Considered repurchase: Firm uses EUR 500m existing cash to repurchase stock
o True
o False
  This is False because. The firm buys back 5 million shares with the EUR500
million. Number of shares outstanding after the repurchase: 995 million
shares.
 Foregone interest: 1%*(1-30%)*EUR500 million = EUR 3.5 million. After
purchase earnings: EUR4.95 billion -EUR3.5 million =EUR4946.5.
 After-repurchase EPS: EUR4946.5 million/995 million = EUR 4.97135...
 As a result, the considered repurchase does not manage to push the EPS
above the analyst consensus.
5) Recall the paper on the real effects of payout by Almeida, Fos and Kronlund (2016). The
made-up figure below plots the probability of an accretive share repurchase over the pre-
repurchase EPS surprise. This figure suggests that firms which are likely to narrowly miss the
analyst forecast consensus have incentives to engage in accretive share repurchases in
advance of the earnings announcement.

o True
o False
 This is correct. The distribution around the threshold seems continuous.
There is no jump.
6) Recall the paper on the real effects of payout by Almeida, Fos and Kronlund (2016). The
discontinuity around zero  pre-repurchase EPS surprise is more pronounced for financially
unconstrained firms.
o True
o False

Quiz 4
1) The new Norwegian law mandated a female quota of 30%.
o True
o False
 It was 40%
2) Which consequences would a Norwegian firm face in December 2005 if 3 out of 10 directors
are female?
o The company will be subjected to a considerable fine.
o The firm would not face any serious consequences.
o The government has the power to elect the necessary number of female board
members to fulfil the quota requirement.
o The company will be dissolved.
3) In May 2008, what is the number of public Norwegian firms which were not compliant with
the law scaled by the total number of Norwegian public firms? Please indicate this number in
percent and round to 2 decimals.
o 0
4) Assume that the study by Ahern and Dittmar would have found a positive effect on firm
value. Choose the statement(s) below that could explain this result.
o The quota leads to a positive shift in the supply of female directors, thereby
increasing board diversity. This increase enhances the quality of board monitoring
and the quality of decision-making process of the board.
o Firms choose their boards to maximize firm value, but the quota imposes a legally
binding constraint.
o There is no causal impact of the quality of boards on firms.
o Firms choose their boards to maximize firm value, but the quota does not impose
any legally binding constraint.
o Firms do not choose to maximize firm value and the quota imposes a legal
constraint to self-serving behavior.
5) In the paper by Ahern and Dittmar, the mean abnormal return at the initial announcement of
the board quota for firms who had female directors already was …. % (please round to two
decimals and indicate the value with a decimal point in percentages). The mean abnormal
return at the initial announcement of the board quota for firms that did not have any female
director at that time was ….% (please round to two decimals and indicate the value with a
decimal point in percentages).
o -0.02
o -3.55
6) Consider the results in Table 11 of the paper by Eckbo, Nygaard and Thorburn (2020). When
regressing ROA on a dummy indicating a "treated firm" interacted with a dummy that is set
to 1 for years after and including 2008, and to 0 otherwise, while controlling for firm
characteristics, firm fixed effects and year fixed effects, the coefficient estimate for this
interaction term is ……(round to 2 decimals) when considering the time period from 2003 to
2009. When extending the sample period to 2013, the coefficient estimate is ……. (round to 2
decimals).
o -0.02
o -0.00
7) Which conclusion cannot be drawn from the paper by Eckbo, Nygaard and Thorburn (2020)?
o Norwegian firms maximize firm value and the quota imposes a legal constraints to
this maximization.
o A regulatory event study needs to account for potential cross-sectional correlation.
o The results are highly sensitive with respect to the choice of the event date.
o There was no shortage of highly qualified female Norwegian candidates.
8) What are the key differences in the paper by Eckbo, Nygaard and Thorburn (2020) relative to
Ahern and Dittmar (2012) which lead to markedly different conclusion about the impact of
the quota?
o Eckbo, Nygaard and Thorburn (2020) take into account a broader set of publicly
listed Norwegian firms, thereby improving the quality of the proxy for the
counterfactual outcome.
o Eckbo, Nygaard and Thorburn (2020) investigate longer-term implications at the firm
level.
 o Eckbo, Nygaard and Thorburn (2020) employ a different model to compute risk-
adjusted abnormal returns.
o Eckbo, Nygaard and Thorburn (2020) analyze the timeline of the events in detail
and choose a different date for the date on which the market learns about the
quota for the first time.
o Eckbo, Nygaard and Thorburn (2020) take into account potential cross-sectional
correlation of the abnormal returns.

Quiz 5: Common Ownership

1) Berekening
2) This figure is taken from Figure 4 of the paper by AEGS (2020), discussed in class. Please
select the statements which are directly implied by this graph.

- After the industry of the given firm

experiences a new firm being added to the S&P 500, common ownership measures increase
significantly.
- Already in the first year after a new firm of the industry has been added to the S&P 500,
executive wealth becomes less sensitive to firm performance.
- After the initial drop, the decrease in wealth to performance sensitivity remains stable.
- In the years before a new peer firm has been added to the S&P 500, wealth to performance
sensitivity increases.
- The changes in wealth-to-performance sensitivity are only transitory.
- The changes in wealth-to-performance sensitivity are lasting for at least 5 years after the
inclusion of new firms in the S&P 500 in the same industry.
3) Which arguments does Blackrock use to address conjecture of anti-competitive effects?
- Incorrect treatment of data.
- Authors face conflicts of interest.
- As of 2017, Blackrock employed 30 individuals in corporate engagement and proxy voting.
- Blackrock is actively engaged with their investments and advises executives on their business
strategies.
- Blackrock takes it fiduciary duty to clients seriously, which is why they ask for board seats
with every investment.
- It is up to the clients to bear the economic risk of the investments.
- Blackrock holds minority stakes in thousands of different companies.
- Blackrock just has to report the stakes jointly, but given that the stakes are owned by
individual funds under the Blackrock umbrella, it is not the case that Blackrock acts as the
aggregate economic owner.
Quiz 6: CSR: History, Measures and Criticism
1) Which is not one of the good forms of philanthropy mentioned by Rockefeller?
a. To make businesses more productive
b. To ensure that business does not have adverse effects on local community
c. To provide employment with decent pay
2) Some intellectuals in Japan criticised attempts at governmental regulation of working
conditions. What was their argument? 
a. They argued that proposed regulation was too costly for the businesses
b. They argued that regulation would harm the harmonious relationships between
workers and employers
c. The argued that conditions in Japan were much better than in other countries and so
there was no needed for regulation
3) Which was one of the motivations of Hamburg Chamber of Commerce to self-regulate smoke
emissions?
a. It could help them attract more labor
b. It ensured that government did not monitor the industry
c. It would allow them to deflect criticism of capitalism
4) Which one is not an argument made by Friedman to argue that managers should not engage
in purist CSR?
a. CSR generates positive public opinion about corporations which results in
postponement of needed regulation
b. The causes that they engage in could be solved by regulation if they were considered
important enough
c. Managers are supposed to represents shareholder interests and purist CSR hurts that
interest
5) In Friedman's view there are no negative consequences of “rhetoric CSR”?
a. True
b. False
6) What are the key assumptions in Friedman’s main argument? [Multiple answers allowed]
a. Shareholders do not care about social and environmental issues
b. Individuals can implement CSR at least as efficiently as corporations
c. A policy should only be implemented if the majority supports it
7) Friedman’s argument is focused on corporations, does it apply also for sole proprietorships?
a. No, sole proprietorships are run by the owners so the manager invests own money
to the causes
b. Yes, all social and environmental issues should be regulated and not taken care of by
businesses
c. No, sole proprietorships have limited political impact so whether they engage in CSR
or not does not matter much