Articles Flashcards

Question 1

Q

Two Pillars of Asset Pricing (Fama)

What is “bubble”?

Answer

A

“Bubble” - an irrational strong price increase that implies a predictable strong decline.

Question 2

Q

From Efficient Markets Theory to Behavioral Finance (Shiller)

What does in mean that markets are “micro efficient but macro inefficient”?

Answer

A

Across firms there is predictable future path of their dividends and other movements (correspond to EMH) but in aggregate these movements are hardly predictable due to excess noise.

Question 3

Q

Hedge Funds: Past, Present, and Future (Stulz)

Name 4 popular hedge fund strategies.

Answer

A

Long-short equity (identifying over-/undervalued stocks)
Event-driven (significant transactional events such as mergers, bankruptcies etc.)
Macro (mispriced valuations in stock markets, interest rates etc.)
Fixed –income (arbitrage in fixed income markets)

Question 4

Q

HOW DEBT MARKETS HAVE MALFUNCTIONED IN THE CRISIS

Why do haircuts rise in crisis?

Answer

A

Due to lower liquidity

Question 5

Q

CREDIT DEFAULT SWAPS AND THE CREDIT CRISIS

Functions of CDS

Answer

A

allow to sell debt short

Supposed to make markets more efficient

Provide information

Question 6

Q

Agency problems at Dual- Class companies

Major economic advantages of dual- class shares?

Answer

A

Allows a company to grow (selling CF rights, while keeping voting rights), founders or owners of the company can retain control, thus, influence the development of the company;
Prices of CF shares are lower è You can receive some benefits,
In case you are not interested in the control, but just the cashflows from company’s operations;

Question 7

Q

Survey of corporate governance

The most common manifestations of agency costs:

Answer

A

Managers resist takeovers (from the target’s perspective) to protect PBoC rather than defend the interest of shareholders;
Managers overinvest rather than return money to investors (potentially in NPV
When an executive (bad one) dies, then share price goes up (largest for greedy corporations);
Privatizing at a huge premium (Russia);

Question 8

Q

The market reaction to cross-listings: Does the destination market matter?

Advantages of Cross-listing

Answer

A

liquidity (leads to lower cost of capital)
market segmentation (overcomes international barriers; matters most for emerging markets)
information disclosure (requirements, more attention from media and analysts)
investor protection (legislation)

Question 9

Q

The Political Economy of Finance

Interventions in financial markets happen when…

How?

Answer

A

WHEN?

There is a crisis
Pressure or political interests of the intervening party

HOW?

Case by case basis
Policy level

Question 10

Q

U.S. Equity return premium (De Longe, Magin)

What is “equity premium puzzle”?

Answer

A

The gains from equity are significantly higher, yet investment in stocks remains disproportionally low.

Question 11

Q

Two Pillars of Asset Pricing (Fama)

What is Joint hypothesis problem?

Answer

A

We need to know WHAT the market is supposed to do to know whether it does it. If the test fail you can’t tell which of the part failed – asset pricing model or assumptions.

Question 12

Q

Two Pillars of Asset Pricing (Fama)

Why “bubbles” are based only on beliefs and have no evidence?

Answer

A

Large swings in stock prices predict real economic activity
”Price corrections” of bubbles usually wiped out soon after

Question 13

Q

The Law of One Price in Financial Markets (Lamont, Thaler)

Name 2 main arguments why LOOP is violated.

Answer

A

Behavioural biases
Arbitrage isn’t perfect

Question 14

Q

Forensic Finance (Ritter)

How academia can help regulators and law officials?

Answer

A

Attracting attention
Looking at long-run trends

Question 15

Q

Forensic Finance (Ritter)

What has Sarbanes–Oxley Act changed?

Answer

A

Sarbanes–Oxley Act requires executives to report insider trades (including receipt of stock grants) within two days of the transaction (instead of 10th day of the following month).

Question 16

Q

Hedge Funds: Past, Present, and Future (Stulz)

What is the future of hedge funds?

Answer

A

Worse performance (more of them)
More instutionalized (institutional investors need more info)
More regulated

Question 17

Q

CREDIT DEFAULT SWAPS AND THE CREDIT CRISIS

Problems with CDS

Answer

A

no need for monitoring

perverse incentives (drive into bankruptcy)

Question 18

Q

Survey of corporate governance

Drawbacks of being a large investor?

Answer

A

Bear extensive risk due to lack of diversification
Advocate own interests sometimes at expense of other investors
- Detrimental to efficiency
Too soft
- Own agency problems
- Want to exit (failed to terminate their position)

Question 19

Q

The politics of Financial Development: Evidence from Trade liberalization

What is political economy?

Answer

A

Looks at power balances that impact the allocation of social and economic resources (instead of looking GDP, other macro variables, we look at the power, who possess it, where, when, etc. )

Question 20

Q

HOW DEBT MARKETS HAVE MALFUNCTIONED IN THE CRISIS

Three areas crucial in all debt market decisions:

Answer

A

risk capital and risk aversion

repo financing and haircuts

counterparty risk

Question 21

Q

CREDIT DEFAULT SWAPS AND THE CREDIT CRISIS

CDS (def)

Answer

A

insurance against default of a company

Question 22

Q

Survey of corporate governance

Various forms of expropriation:

Answer

A

stealing
transfer pricing (trade with manager’s affiliates)
private benefits of control (PBoC)
entrenchment

Question 23

Q

The Political Economy of Finance

2 goals of privatization?

Answer

A

Raise revenue
promote competition and economic reform

Question 24

Q

Private benefits of control: An International Comparison

How can we measure PBoC?

Answer

A

Two ways:

Control Premium approach (looking at the private negotiations where controlling blocks are sold, typically, for a premium, the question is, what premium do they sell at?);
Voting rights approach (dual class shares and voting shares trade at a premium that includes probability of a control contest premium for control);

Question 25

Q

Leveraged buyouts and private equity

What is special about Private Equity from financial perspective?

Answer

A

Mgmt. incentives (give stock, make mrg invest) – equity illiquid, has to perform
Leverage – pressure not to waste money (reduces AC), increases value through TS, but can’t be too high

Question 26

Q

Agency problems at Dual- Class companies

What are the ways to allianate (expropriate) outside investors?

Answer

A

Increase compensation
Acquisition
Invest in negative NPV projects (not favorable by all shareholders)

Question 27

Q

Capital Asset Pricing Model (Perold)

Is expected return influenced by internal company characteristics? (e.g. CFs)

Answer

A

E(r) is not characterized by internal company characteristics

Question 28

Q

Agency problems at Dual- Class companies

4 channels of how the difference between Cash Flow rights and insiders control rights lead to lower shareholder’s value?

In other words, how managers of the company can decrease shareholder’s value?

Answer

A

Engage in value destroying activities;
Demand excessive remuneration;
Misuse corporate cash reserves;
Make poor capital decisions;

Question 29

Q

Coase Versus Coasians

What is coase theory about?

What is coasians theory about?

Answer

A

Coase- when there is a well defined property rights, transaction costs are zero, there are no taxes ==> you don’t need any intervention from the government. Rather market participants will organize their transactions in ways that achieve efficient outcomes
most securities transactions involve private arrangements to achieve efficiency, need contracts. Effective and complicated contracts need effective judicial enforcement. (main assumption: judges must be able and willing to read complex contracts!!!!)

Question 30

Q

U.S. Equity return premium (De Longe, Magin)

Why equity premium is predicted to decline in the future?

Answer

A

Institutional changes:

removed constrains on investing in equities
easier to invest
rise of mutual funds (easier to achieve diversification benefits)

More long-term oriented market participants

Question 31

Q

From Efficient Markets Theory to Behavioral Finance (Shiller)

What is meant under “Biased self-attribution”?

Answer

A

Individuals attribute events that confirm the validity of their actions to their own high ability and attribute events that disconfirm their actions to bad luck or sabotage.

Question 32

Q

Corporate ownership around the world

What are the proposed solutions for the problem of ownership concentration?

Answer

A

Radically improve laws (make expropriation more difficult);
Improve disclosure requirements;
Change in structure of board of directors;
Mandatory requirement- one share –one vote;

Question 33

Q

From Efficient Markets Theory to Behavioral Finance (Shiller)

Name 4 reasons why mispricing can’t always be corrected (EMH argument)?

Answer

A

Rational expectations bubbles (still make sense to invest in overvalued stock because you know that stupid people will still invest and price will continue to grow)
Noise trader risk (if I short it right now there is a risk that irrational investors will continue to increase the price)
Switching between asset classes (other style classes still give rational investors decent returns and there is not so big incentive to correct the mispricing)
Limits to short selling (some markets are super restrictive, expensive and have other barriers)

Question 34

Q

Forensic Finance (Ritter)

What is meant by “Spinning of IPO’s”? Why bookrunners and executives do it?

Answer

A

Under-priced IPOs were allocated to top executives of corporations. Typically initial offer price is less than 1st day’s closing price.

Why do book runners do it? - “Soft dollars” from commission payments.

Why do executives do it? - Agency problems + bribing

Question 35

Q

Capital structure

pecking order theory (Description)

Answer

A

internal CF->borrow->equity (assumes perfect markets, but investors don’t know the true value of their assets)

issue of stock only if overvalued (if undervalued – wealth goes from existing to new s/h) -> no issue when undervalued, because issue drives down prices
debt – not so big info asymmetry – price falls by less
internal financing – no loss in value
explains why profitable firms borrow less

Question 36

Q

From Efficient Markets Theory to Behavioral Finance (Shiller)

What is “macro inefficient”?

Answer

A

Macro inefficient – there’s excess volatility in the stock market and this holds even when we account for:

Dividend smoothing
Time varying discount rates

Question 37

Q

The Corporate Governance Role of Media: Evidence from Russia

What affects the decision to commit a corporate governance violation?

Answer

A

A manager’s expectation of the likelihood the relevant players will learn about his decision and in such an event how harshly his decision will be judged. After the decision has been made, however, what determines the probability with which this decision is reversed is the actual realization of those costs, which is greatly affected by the coverage in the media.

Question 38

Q

Capital structure

M&M Theory (Describe)

Answer

A

financing doesn’t matter, if perfect and frictionless capital markets; Cost of capital constant

Taxes – tax shields, but depend also on individual taxes of investors

Question 39

Q

CREDIT DEFAULT SWAPS AND THE CREDIT CRISIS

Disadvantages of OTC

Answer

A

Disorganized clearing process
Tailoring
Unknown counterparties (exposure) – don’t know who bought/sold

Question 40

Q

Leveraged buyouts and private equity

Describe all steps in a process of leverage buyout

Answer

A

buy a firm with premium above stock price
financed with debt (60-90%)
new mgmt. team, that also contributes to equity
take company private
improve performance
sell after 6-7 years to

strategic buyer
another PEF in SEO
IPO

Question 41

Q

Survey of corporate governance

The essence of agency problem?

Answer

A

separation of ownership and control

financiers need manager’s human capital to generate returns
manager needs financiers’ funds as he doesn’t have enough or wants to stay away

Question 42

Q

THE ECONOMICS OF STRUCTURED FINANCE

Problems with vulnerability of investors’ position

Answer

A

Overlap in geographical location => high default correlation and systematic risk
Deteriorating credit quality of the borrowers + “fire-sales”
CDO² magnified effects the errors

Question 43

Q

Rank Honda Dio ZX.

Question 44

Q

Capital Asset Pricing Model (Perold)

Why does sub-optimal diversification still exist?

Answer

A

Irrational investors
Behavioural biases
Transaction costs

Question 45

Q

Two Pillars of Asset Pricing (Fama)

What is the main issue for EMH and all asset pricing models?

Answer

A

MOMENTUM!

Question 46

Q

Overvalued equity and financing decisions

Arguments for rising more capital when overvalued:

Answer

A

Market inefficiency => exploit investors and market errors
Catering investors’ expectations- Pressure to prove that indeed there are growth perspectives
Project scale economies - Invest in large-scale projects
Investor short-termism - Overvalued equity financing is more attractive

Question 47

Q

Forensic Finance (Ritter)

Are mutual funds harmed by late trading (lower returns)?

Answer

A

No, because they get something in return (e.g. hedge funds investing in mutual funds with high fees)

Question 48

Q

Capital Asset Pricing Model (Perold)

How risks and expected returns are combined in CAPM?

Answer

A

Risks are combined nonlinearly (diversification effect) while expected returns are combined linearly (weighted average)

Question 49

Q

Survey of corporate governance

Why do investors, being informed about agency costs, etc. still rely on managers?

Answer

A

Firms and managers have reputations to secure external financing;
Investors are naive and overoptimistic (ponzi scheme, railroad);

Question 50

Q

The politics of Financial Development: Evidence from Trade liberalization

Determinants of financial development:

Answer

A

Political economy
Legal origins
Legacy of colonization
Culture and religions
Social capital endowments

Question 51

Q

The Law of One Price in Financial Markets (Lamont, Thaler)

Name 3 assumptions of Law of One Price. Are they realistic?

Answer

A

Transactions are costless (unrealistic)
Competitive markets
No barriers of trade (unrealistic)

Question 52

Q

Overvalued equity and financing decisions

Effect from High equity share in new issues

Answer

A

low aggregate stock returns

Question 53

Q

Agency problems at Dual- Class companies

When the CEO’s compensation is higher?

Answer

A

Firm size is large;
Leverage is lower;
Volatility (risk) is greater;

Question 54

Q

Capital Asset Pricing Model (Perold)

CAMP empirical performance is weak, evidence show it doesn’t work, but why still used?

Answer

A

Useful benchmark
Predictor in low friction markets
Easy-to-use
Does give us a viable prediction about what we are moving towards to – PCM

Question 55

Q

Agency problems at Dual- Class Companies

Two classes of stocks in Dual- class companies?

Answer

A

Superior- multiple votes per share, usually not publicly traded;
Inferior- one vote per share and is publicly trade;

Question 56

Q

Should We Fear Derivatives? (Stulz)

Name 5 risks associated with derivatives

Answer

A

Hard to understand & value (exotics are complicated)
Liquidity of derivative markets (some exotic derivatives are illiquid)
Transparency & reliability of accounting (you can hide some things away with derivatives – they are not reported)
Perverse incentives (not punished for loses but rewarded for gains)
Systematic risk (derivatives are very effective but if you lose you lose a lot, and whole market can lose)

Question 57

Q

Credit default swaps and the credit crisis

List benefits of CDS

Answer

A

Risk is borne by those who can do it
Obtain financing that otherwise is not available
Better credit risk information
Market efficiency and transparency

“Naked position”

Question 58

Q

Corporate payout policy

Benefits of own Stock Repurchases

Answer

A

Flexibility (can’t reduce dividends, can do only 1 repurchase)
correct stock valuation (repurchase before appreciation, procyclical, not just to exploit investors – nobody would sell)
remove low valuation stockholders (avoid takeovers)
allocation of voting rights (remove threatening blockholders, increase mgmt. ownership, remove LV investors)
increase EPS (just less shares, repurchases associated with productivity growth)
stock option plans – option values decline due to dividends, but not repurchases
transaction costs saving (less s/h)

Question 59

Q

Private benefits of control: An International Comparison

What PBoC dependent on?

Answer

A

firm characteristics- size&maturity (more products you sell, the more you extract benefits)
Whether controlling block is traded (whether one can buy a control)
Bargaining power of involved parties

Question 60

Q

Fiduciary duties and equity-debtholder conflicts

Case of Delaware:

Answer

A

In 1991, Delaware Court issued a ruling, under which: if a firm is in the zone of insolvency (financial distress), directors owe duties not only to shareholders(s/h), but also to debtholders (d/h).

Question 61

Q

Corporate ownership around the world

What is a widely held corporation?

Answer

A

A widely held company or a publicly listed/ traded company is a company that has issued securities/ shares through an initial public offering (IPO) in the primary market, has a mandated statutory basic paid up capital, and is traded on at least one stock exchange or in the over the counter (OTC) market

Question 62

Q

The Capital Asset Pricing Model: Theory and Evidence (Fama, French)

Why CAPM is hard to test?

Answer

A

No good proxy for market
Data for all marketable assets is beyond reach
Problem is to understand whether CAPM isn’t a real model or CAPM has weak empirical evidence due to irrational investors or both.

Question 63

Q

Forensic Finance (Ritter)

Name 4 unethical (illegal) practices investigated in the article.

Answer

A

Late Trading
Stock Option Backdating
Spinning of IPO’s
Rewriting history: Market Recommendations

Question 64

Q

Survey of corporate governance

Why is hostile takeovers’ effectiveness questionable?

Answer

A

quite expensive, so only major flaws are likely to be addressed
can increase agency costs – if bidding managers overpay for acquisition of PBoC
requires liquid capital market – not always available
political vulnerability

Answer 64

A

Includes Price-to-book ratio (HML) and Size ratio (SMB).

Answer 65

A

Limits on FDI
Risk of mispricing
Lacking ability to short sell, stock isn’t infinitely divisible
Transaction costs, barriers for trade

Answer 66

A

When speculative prices go up, creating success for some investors, this may attract public attention, promote word-of-mouth enthusiasm and create expectations about further price increases. But as new prices are formed just on expectations they aren’t sustainable and bubble will eventually burst (e.g. tulipomania, dot.com bubble). Works also in opposite direction!

Answer 67

A

Extreme corporate governance violations (change the venue just before the voting so that other voters can not vote);
Non- existent or inefficient mechanisms to address the violations;
Hermitage fund practicing media strategy;
Reputational costs of a decision were low;
Major regime shifts
Head Hermitage Capital was a foreigner (thus, independent);

Answer 68

A

Overvalued firms
Growth firms (low B/M or high R&D)
Firms with more intangible assets and R&D
Small firms
Firms where investors have short investor horizons (catering)
Firms with high insider selling
High turnover firms (proxy for short term focus of shareholders)

Answer 69

A

Pleasure of being in cotrol (non- monetary, example: family business)
Monetary benefits
Value of information

DEFINITION: Added value for having the controlling share (the one that can not be accessable to the non controlling shareholder)

Answer 70

A

returns increase in London, US, continental Europe, not in Tokyo
US: information disclosure and protection
London: segmentation and protection
Accounting standards and timeliness significant determinants
No evidence that firm-specific factors matter
Firms from emerging markets benefit more

Answer 71

A

usually closed-end
raises capital for the firms
limited lifetime (10 years)

Answer 72

A

CDS –an insurance contract against default of an entity (can be traded, don’t have to hold a security, indices based on CDS)

Answer 73

A

Bankruptcy laws, moratoria (legally binding halt to collect debt from the bankrupt), bail- outs (credit availability)
Branching restrictions (foreign bank open the branch) , restrictions of deposit insurance (protection provided by government agency to depositors to insure against the risk from failure of a bank)èincreases competition between the banks

Answer 74

A

Low default correlation =>

        =\> probability of simultaneous default↓=\>  

        =\> safe senior claim

Answer 75

A

Regulations, e.g. on insider trading (some countries are not monitored)
Development of securities markets

Answer 76

A

less leverage
more minority stakes (new operational engineering capabilities – better position than in the past)
decrease in activity due to crisis

Answer 77

A

high debt level increase value despite threat of financial distress, when operating CF significantly exceeds profitable investment opportunities

Answer 78

A

Better risk allocation (gives more options to choose from)
Informational efficiency (prices of derivatives can give more information about prices of other things)
- Hedging*
Cheaper than replication (in the real world you have transaction costs, frictions etc.)
Expands investment opportunities (taking more profitable but risky projects thus increasing overall welfare)

Answer 79

A

To protect debtholders
To prevent managers from favouring shareholders at expense of debt-holders

Answer 80

A

Assets should be priced only based on non-diversifiable risk (idiosyncratic risk)

Answer 81

A

Sensitive to agency’s estimates

Diversifiable risk => systematic risk

Answer 82

A

Widely held corporation ) is a predominant form of ownership in the richest common law countries (especially the USA);

Answer 83

A

Non–time-separable utility (people ensure some level of liquidity they need)
Higher short-term risk of equity may discourage from investing –myopia.
Higher sensitivity to losses than to gains – loss aversion.
Transaction costs and borrowing costs (assumptions on perfect market are not realistic => barriers on investing in stocks)
Stock market is less predictable – ambiguity aversion.
Misperceptions that equity returns are very risky that drove premium up are gradually correcting, thus premium will continue to decline in the future.
Survival bias – only successful stock are taken into consideration.

Answer 84

A

comparatively small
high-profile teams

Answer 85

A

Typically employee options are announced with a day, this gives company the ability to choose the exercise price they issue them on from the previous days.

Answer 86

A

overinvestment (risky strategies)
underinvestment
cash payouts

Answer 87

A

Debt overhang
Risk shifting
Built-in protection by creditors (i.e. higher costs of debt)
Contractual protection by creditors (debt covenants)
Positive response of stock prices

Answer 88

A

Legal

Legal environment (post communist have high PBoC, lowest in German, English, and Scandinavian legal origins, not distinguish between common law and civil law, but a bit more complex differences)
Disclosure standards
Enforcement

Extra Legal

Product market competition
Public opinion ==> higher press diffusion (more spread out, more channels) ==> less PBoC
Moral norms ==> Use violence and religion as a proxy- Catholic countries have higher PBoC, and Protestand ones lower
Labor as a monitor
Tax enforcement

Answer 89

A

Czech Republic:

Below average investor protection, Government supervises markets, easy exams, no need for „honest trading“, No real power for the commision to revoke broker’s licenses, Significant problems in financial system, Firms unable to rise capital and extensive tunneling

Poland:

Average investor protection, Securities Commission for market supervision (independent), Licensing by testing- had to do „honest trading“ or lose license, Extensive disclosure of information, relies on administrative control- increased interest in justice relative to enforcement, regulators become informed- reduce probability of leniecy (due to decrease in cost of getting information)

Answer 90

A

1) Young growing firms rely on equity financing, while mature firms prefer bank finance
2) LBOs increase efficiency

Answer 91

A

Lower incentives to monitor
Perverse incentives (drive into bankruptcy)
Excessive risk-taking
Possibility of web exposure
Counterparty risk

Difficult to price

Answer 92

A

Employment (increase efficiency, can lay sb off – employment grows but at a slower rate)
Taxes (TS due to increased leverage)
information asymmetries (not really, but can negotiate deal better than others)

Answer 93

A

Investors are rational
Irrational investors cancel each other out b/c random
Even when they don’t cancel out, arbitreurs take advantage and the irrational make loses

Answer 94

A

Cost of getting informed is larger than the benefit you can make from being informed; can be overcomed by making political news entertaining!!!

Answer 95

A

Lack of transparency makes it hard to evaluate
Look for arbitrage, but when things go wrong, make big loses
Poor investor protection
Illiquidity risk (because lots of hedge funds take similar positions they can all mess up at the same time. -> spill overs to financial system/institutions)
Low diversification

Answer 96

A

36% of firms in the world are widely held;
30% family controlled;
18% state controlled;
15% cross holdings, pyramids and miscellaneous;

Answer 97

A

Strong – prices incorporate all information, public and non-public
Semi-strong – prices implement all public information
Weak – prices incorporate all information of past price movements

Answer 98

A

Young firms retain CFs (profitable investment opportunities)
Older – pay out (to reduce agency costs)
Against “residual” theory (pays cash when has it left)

Answer 99

A

regulations allowed to hold risky securities if had CDSs, have less capital
web exposures
exposed while replacing swaps

Answer 100

A

Returns (interest rate) is guaranteed
May have claims on specific assets
Rights to pull collateral
May enforce some refund.

Mature firms use debt rather than equity

Debt is easier to price (just a value of collateral)

Answer 101

A

changes in capital structure affected by both availability of internal finance and market conditions
D/E affects corporate structure and decisions
Mgmt. matters a lot

Answer 102

A

Major announcements move prices => companies usually wait till after the market closes => trading then by using closing prices => profit

Answer 103

A

Concentrating on low beta stocks, small stocks or value stocks will tend to produce positive abnormal returns relative to the predictions of CAPM without any talent of managers. Due to the fact that empirically relation between beta and average return is flatter than predicted by the Sharpe-Lintner version of the CAPM.

Answer 104

A

most developing countries, because of lack of credible media outlets and usophisticated public opinion

Answer 105

A

transparency
reduces CP risk

Answer 106

A

hard to price
sellers didn’t have ability to bear the risk they took on (thought it was smaller in CDOs)
support more risk-taking

Answer 107

A

Lacking society values and culture
Lacking legal institutions and shitty quality of enforcement
Less developed capital markets
Privately negotiated privatizations
Ownership concentration

Answer 108

A

Diffusion (number of relevant groups);
Credibility;
Surrounding environment;

Companies need financing and good reputation now;
Moral norms of media correspond to the ones of society;

Answer 109

A

Signaling and information distribution

Investor’s mental accounting and behavioural biases (empirical support weak)

Managerial over-confidence and biases

Taxes
Consumption/ demand

Answer 110

A

interest payments are tax-deductible
debt forces to distribute cash
debt has strong liquidation rights

Answer 111

A

Non-mortgage loans (cars, credit cards)

Corporate loans

Residential/Commercial real estate loans

Answer 112

A

debt level to balance the tax advantages of additional debt against the costs of financial distress

taxes – justifies moderate debt ratios, most profitable companies borrow the least(paradox, as should borrow more to offset taxes)
safe, tangible assets – borrow more (lower cost of distress)

Answer 113

A

Smoothing accounting earnings (minimize volatility of earnings)
Speculation
Regulatory arbitrage
Optimize tax (reduce the present value of tax liabilities)

Answer 114

A

Investors are risk averse, judge based on μ and σ (rational)
Investors make estimates and make them the same way (same discounts and calculations)
Same investment opportunities
Perfect Capital Markets

Answer 115

A

Infinitely divisible assets
No transaction costs
Information is costless and available to everyone
Every can borrow and lend at a risk free rate

Answer 116

A

quality of investor protection
bad shareholder protection

Answer 117

A

The “new political economy” approach treats policy-makers as self-interested agents responding to political incentives (explains: change in financial regulations)

Answer 118

A

Reduce the costs to stay informed;
Solve „rational ignorance“ paradox: cost of getting informed is larger than the benefit you can make from being informed; can be overcomed by making political news entertaining!!!
Increase the effect of reputation, which is very important;
Increase the reputation cost of misbehavior;

Media coverage is effective only when a behavior violates norms that are widely accepted in society.

Answer 119

A

Agency problems
Market for corporate control (the risk of takeovers)
Public ownership and privatizations
- Ideological- keep passive shares
- Populist- may give shares to median voter

Answer 120

A

annual mgmt. fee
share of profits (~ 20%)
deal and monitoring fees from the companies

Answer 121

A

is underinvestment or at least under-provision of external finance (outside investors fear manager expropriation) and low managerial effectiveness

Answer 122

A

Personal costs with regard to

Time
Reputation&self- esteem
Personal incentives (values, moral norms)
Interest in justice;

Costs can be reduced by legal and regulatory mechanism (if you have any other good institution that can provide you with a qualitative information instantlyè reduction in costs of searching)

Answer 123

A

Closed country funds
Dual-class shares
Twin shares
Corporate spin-offs
American depository receipts

Answer 124

A

ICAPM (Merton): Includes inter-temporal aspect apart from beta
3-factor (F&F): Includes size and market-to-book ratios
4-factor: Includes size, market-to-book and momentum
APT (Arbitrage Pricing Model): includes mainly macro, e.g. oil shocks, GDP

Answer 125

A

Provide information

Allocation

Diversification

Answer 126

A

liquidity

informational efficiency

integrity

Answer 127

A

informed traders - win but they pay for the information

uninformed traders loose to informed, but still have risl premium

Answer 128

A

Completness

Coherence

Practicability

Answer 129

A

Ulitarism

Dentology

Kontian ethics

Virtual ethics

Answer 130

A

the action is moraly “right” if it maximises the total utility of a group that is affected by the action

Answer 131

A

We are not concerned about outcome, we concerned about actions

Answer 132

A

Only act on rules that you would be willing for every one to follow

Answer 133

A

one should cultivate desirable personality traits and then with these traits he/she will make ethical decision

Answer 134

A

Obedience and punishement orintation
Self-interest orientation
Good interpersonal relations
Authority and social-order maintaining orientation
Social contract and individual right orientation
Universal ethical principles

Answer 135

A

the greatest good for the greatest number

Answer 136

A

market manupulation

Insider trading

Lobbying

Rating agencies conflicts of interests

Money laundering

Answer 137

A

Analysts that trade in advance of issuing recomendation

Answer 138

A

the system that channels household savings to the corporate sector and allocate investment fund among firms

Answer 139

A

Bank oriented system

Market oriented system

Answer 140

A

outside, manager of another company

Answer 141

A

Proxy vote by mail

Shares not blocked before meeting

Cumulative voting

Oppresed minority mechanism

Preemptive rights to new issues

Less than 10% of shares needed to call an extraordinary shareholders’ meeting

Answer 142

A

Involving a confidence of trust

Answer 143

A

Problem in continental Europe between controlling owners and minority shareholders
Problems in the US and the UK: between management and minority shareholders

Answer 144

A

Dual-class shares

Pyramids

Cross-shareholding

Shareholder-agreements

Limited voting power

Answer 145

A

Optimal share owner return

Accountability

Transparency

One share/One vote

Long-term vision

Answer 146

A

Instable incentive effect

New allocation often needed to preserve incentive effect

Too short lock-up period

Answer 147

A

Easier to attract foreign capital

Easier to become integrated

Easier to mobilize nat. capital

More efficient capital allocation

Answer 148

A

Allocation of portfolio investment
Determine the apropriate risk adjusted discount rate
discount future cash flows