Behind the Scenes: The Corporate Governance Preferences of Institutional Investors Flashcards
What is the primary reason private discussions with management are the preferred engagement method for institutional investors?
Private discussions often lead to faster and more cooperative resolutions than public actions.
According to McCahery et al. (2016), how does liquidity impact the use of “voice” as a governance tool?
Higher liquidity reduces reliance on voice as it makes exit easier.
Why might exit and voice be considered complementary governance mechanisms?
a) Both strategies require minimal costs and are equally effective when used separately.
b) Exit threats encourage managers to respond to voice-based concerns, while voice provides an option before resorting to exit.
c) Investors generally lack the expertise for voice, so they rely on exit as the primary tool.
d) Exit and voice only work in tandem when investors have minimal ownership stakes.
Exit threats encourage managers to respond to voice-based concerns, while voice provides an option before resorting to exit.
What is the primary determinant of the credibility of an exit threat?
a) The investor’s average holding period of the shares.
b) The size of the stake held by the investor, balanced to avoid large price impacts.
c) The level of public criticism directed at the company before the threat.
d) The investor’s ability to use proxy advisors for coordinated action.
b) The size of the stake held by the investor, balanced to avoid large price impacts.
Why is shareholder activism, such as submitting proposals, relatively rare among institutional investors?
a) Proposals are discouraged by legal rules and regulations.
b) Institutional investors focus exclusively on private discussions.
c) Shareholder proposals have high costs and historically low approval rates.
d) Activism conflicts with the fiduciary duties of most institutional investors.
b) Institutional investors focus exclusively on private discussions.
How does investment horizon affect the use of voice as a governance mechanism?
a) Short-term investors are more likely to use voice as it aligns with their immediate profit motives.
b) Long-term investors are more likely to use voice because they benefit from long-term improvements.
c) The investment horizon has no measurable impact on the intensity of voice.
d) Short-term investors and long-term investors rely equally on voice strategies.
B
What discourages institutional investors from engaging in shareholder activism?
a) High costs of exit strategies.
b) The “free rider” problem, where costs are borne by activists but benefits are shared among all shareholders.
c) Overreliance on proxy advisors for governance decisions.
d) Lack of financial expertise among institutional investors.
b) The “free rider” problem, where costs are borne by activists but benefits are shared among all shareholders.
Which of the following is true about the role of proxy advisors?
a) Proxy advisors are mandated to take an active role in all shareholder decisions.
b) Proxy advisors provide recommendations and reduce the cost of being informed, but their advice is sometimes criticized for being too generic.
c) Proxy advisors eliminate the need for investors to conduct their own governance analysis.
d) Proxy advisors actively encourage shareholder proposals to improve governance.
b) Proxy advisors provide recommendations and reduce the cost of being informed, but their advice is sometimes criticized for being too generic.
Why do tracking error concerns discourage exit as a governance tool for some institutional investors?
Divesting from portfolio firms leads to deviations from benchmark index performance.
What is the key finding of McCahery et al. (2016) regarding the relationship between voice and exit?
Voice and exit are complementary mechanisms, often reinforcing each other.
In the paper Behind the Scenes: The Corporate Governance Preferences of Institutional Investors (2016), what two governance mechanisms are documented, and how are they viewed in relation to each other?
A) Voice and proxy advisory, viewed as competing mechanisms.
B) Exit and liquidity, viewed as complementary devices.
C) Voice and governance-motivated exit, viewed as complementary devices.
D) Proxy advisory and exit, viewed as independent mechanisms.
E) Voice and exit, viewed as mutually exclusive choices.
C
What challenge does the paper highlight regarding the analysis of the use of the ‘exit’ threat by institutional investors?
A) The challenge that the exit threat is by definition unobservable from the outside.
B) The difficulty in proving the effectiveness of the exit threat in bringing about changes in management behavior.
C) The complexity of investors’ varied responses to the exit threat.
D) The uncertainty about whether investors truly intend to exit or just threaten to do so.
E) The difficulty in tracking and documenting the exit threat due to the lack of transparency in institutional investor strategies.
A
What are the three possible determinants of the hedge fund’s voicing strategy?
Liquidity, investor horizon, and size of the investor’s stake
According to McCahery et al. (2016), how do institutional investors typically engage with companies?
A) By submitting formal shareholder proposals.
B) By engaging in behind-the-scenes negotiations before taking public action.
C) By conducting proxy battles to replace management.
D) By coordinating public campaigns against underperforming firms.
E) By threatening legal action as a first resort.
B
What percentage of institutional investors surveyed engaged in discussions with management?
A) 30%
B) 45%
C) 63%
D) 80%
E) 95%
C
