Question

able to stockholders in the market will be badly managed True False We choose firm valu sume that makes are eficient hinctive in decision make making we do not need to True False with fewer directors re a lly effective corporate governance than boards True False 4. Rounds with me hands with move insiders are few insider ally more effective at corporate overnance than boards with True False 3. Pinancial markets tend to reach negatively investment announcements (R&D, new project) made by firms True False 6. The marginal investor in a stack is the investor who holds the most stock in the company True False Question 3 (3 marks) In any firm, the balance of power between stockholders and managers is a function of internal as well as external factors. Events can cause the power to shift towards managers or towards stockholders or leave the balance unchanged. Evaluate how each of the following events would alter the balance of power. Event Management Power increases (1) Stockholder Power increases No Effect The firm decides to expand its board of directors from 11 members to 22 members and allows the CEO to pick the additional directors. An activist investor manages to get three of his nominees elected to the board of directors at the expense of management nominees. The state passes a law restricting hostile takeovers. The CEO of another firm in the same industry is replaced because of poor stock price and earnings performance. CalPers, the California Employees Pension fund with a history of activism, buys 5% of the outstanding stock in the fim. The firm's stock, which is currently followed by no analysts, is added to the list of followed companies at four investment banks

Answer 1

It is not specified which activity to focus on, so I will help with Question #3.

Event 1: I agree with the answer due to the fact that the CEO will naturally select Directors that he/she is comfortable with, i.e. he/she goes along with. In this way, the decisions taken by the management body will be backed up by more members of the Board. Thus, the management power wil definitely increase (1).

Event #2: In my opinion, thr actions undertaken by the investor will increase the Stockholder Power (2) because more Directors in the Board will watch after the interests of this investor.

Event #3: I think there is no dominating power increase as a result of the law. Each hostile takeover might have very specific impact on one or both sides depending on the underlying reasons that motivated the hostile, however, placed in general terms, it is difficult to measure which power will increase more. So, I will opt for No effect (3).

Event #4: Unless both companies have some ownership link, which does not seem to be the case based on the information, I agree that this should imply no effect (3)

Event #5: Totally agree with the answer selected. Stockholder power will increase (2) because the fund is active and there is more at stake due to the characteristics of the fund even though 5% is not that much of an ownership (still it might represent certain concentration in case that all the remaining ownership is widely disperse).

Event #6: From my point of view, the Stockholder power will increase (2). This would be an indirect way of having a better control because more external eyes will watch on the company´s performance. The scrutiny will oblige the managers to think twice their decisions before any actions have been undertaken.