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Which of the following statements is true in the context of stock-based compensation?


A) Stock options usually result in information asymmetry.
B) Stock-based compensation schemes for executives can align management and stockholder interests.
C) A particular cause for concern is that stock options are often granted at extremely high strike prices.
D) Critics deny that stock-based compensations motivate managers to improve company performance.
E) Granting more stock options often results in an increase in stockholder equity.

F) A) and B)
G) A) and C)

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_____ is a situation where an agent has more knowledge about resources he or she is managing than the principal has.


A) Information manipulation
B) On-the-job consumption
C) Information asymmetry
D) Greenmail
E) Self-dealing

F) A) and E)
G) A) and D)

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Which of the following is NOT a governance mechanism used to align the interests of managers and stockholders?


A) Self-dealing
B) The board of directors
C) Stock-based compensation schemes
D) Strategic control systems 
E) Takeover constraints

F) C) and D)
G) A) and B)

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Members of the Board of Directors are supposed to be agents for:


A) stockholders.
B) employees.
C) executive officers.
D) customers.
E) suppliers.

F) D) and E)
G) B) and E)

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Which of the following statements is true about takeover constraint?


A) It encourages managers to put their own interests above those of stockholders.
B) It usually occurs when the management has maximized the wealth of the stockholders.
C) It often gives senior managers more independence when it comes to granting stock options.
D) It has ceased to exist in companies since the late 1990s.
E) It is the governance mechanism of last resort invoked only when the others have failed.

F) A) and B)
G) A) and E)

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Business ethics are concerned with accepted principles of right or wrong governing the conduct of businesspeople. Identify and discuss the common examples of unethical decisions that businesspeople have made.

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Unethical behavior often occurs when peo...

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If a company fails to take stakeholder claims into account, stakeholders may withdraw their support.

A) True
B) False

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Which of the following statements is true in the context of principal-agent relationships?


A) The agency relationship is confined to the top management and does not continue down the hierarchy within the company.
B) Agents almost always have more information about the resources they are managing than the principal does.
C) Information asymmetry can make it easier for principals to measure how well an agent is performing.
D) In a principal-agent relationship, the decision making power rests entirely with the principals.
E) The relationship between the company and the suppliers is an example of a principal-agent relationship.

F) A) and D)
G) All of the above

Correct Answer

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Which of the following governance mechanisms is regarded as the option of last resort?


A) Strategic control system
B) Takeover constraint
C) Board of Directors
D) Stock-based compensation system
E) Financial statements and auditors

F) All of the above
G) B) and C)

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_____ are internal stakeholders in a company.


A) Customers
B) Government regulators
C) Board members
D) Suppliers
E) Creditors

F) C) and D)
G) B) and C)

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Stock-based compensation schemes for senior executives are designed to align the interests of managers with those of stockholders.

A) True
B) False

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The internal research department of Libra Inc. has found that the packaging of health supplements produced by the company is faulty, and resulting in poor quality. Despite this knowledge, the company has not improved the packaging and instead has advertised to its customers that their packaging is foolproof. Which of the following concepts is illustrated in this scenario? 


A) Information manipulation
B) Anticompetitive behavior
C) Agency strategy
D) Information symmetry
E) On-the-job consumption

F) C) and D)
G) B) and D)

Correct Answer

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Principals almost always have more information about the resources that agents are managing than the agents themselves.

A) True
B) False

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Which of the following is NOT a responsibility of the Board of Directors?


A) Monitor corporate strategy decisions and ensure that they are consistent with stockholder interests
B) Apply sanctions on management when appropriate
C) Hire, fire, and compensate the CEO
D) Develop targets for divisional managers
E) Make sure the audited financial statements present a true picture of the company's financial situation

F) A) and B)
G) A) and C)

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An agency relationship continues throughout the hierarchy within a company.

A) True
B) False

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Which of the following statements concerning stock-based compensation schemes for executives is NOT true?


A) Under accounting regulations that were enforced until 2005, stock options, like wages and salaries, were expensed.
B) Huge stock-option grants can align the interests of management and stockholders.
C) Stock-based compensation schemes can dilute the equity of stockholders.
D) Huge stock-option grants increase the outstanding number of shares in a company.
E) Top managers can earn huge bonuses from stock options that were granted several years prior.

F) A) and E)
G) None of the above

Correct Answer

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A criticism of stock-based compensation plans is that:


A) they discourage empire building.
B) they reduce motivation among agents.
C) they do not align management and stockholder interests
D) they dilute stockholders' equity.
E) they adversely affect the earnings of principals.

F) D) and E)
G) A) and B)

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Explain the principles of agency theory, including the issues it addresses. What are some effective ways to deal with agency problems, as implied or stated by agency theory?

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Agency theory addresses situations where...

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Phil is an employee at Global Tech Inc. He is considered an external stakeholder.

A) True
B) False

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All stakeholders have an exchange relationship with the company.

A) True
B) False

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