Ch2 - Consequences of poor Corporate Governance

Question 1

Consequences of Poor Corporate Governance

Answer 1

• Insufficient Effort (enjoyable task rather than to benefit)
• Empire Building (xpanding the company’s size than profitability)
• Entrenchment (poison pills, greenmail)
• Self-Dealing (use company resources for personal gain)

Question 2

Poison Pill

Answer 2

It grants all shareholders, except the acquirer, the right to purchase shares of the target company or the merged entity at a discount

Question 3

Greenmail

Answer 3

method of buying enough shares in a company to attempt a hostile takeover to have them bought back by the target company at a premium.
usually bad for company, as they take a loan to rebuy them

Question 4

Underperforming Conglomerats

Answer 4

Conglomerates Underperform
- conglomerates often have lower market values than if they were broken up
- managers use mergers to reduce their own employment risk, not necessarily for shareholder benefit

Question 5

Underperforming (managerial) investments

Answer 5

Cash Windfalls Wasted
- low investment opportunities tend to use unexpected cash for unsuccessful acquisitions
Manager-Specific Investments
- Managers might invest in projects that make them indispensable, even if they are not profitable for the company

Question 6

Shark repellents

Answer 6

provisions in the corporate charter and its bylaws aimed at dissuading hostile takeovers
-> need to be approved by shareholders
e.g staggered or classified BoD, supermajority, voting right restrictions

Question 7

“Gamble for resurrection”

Answer 7

Excessive risk taking in order to increase
employment probability

Question 8

Defensive corporate restructuring

Answer 8

– defensive acquisitions,
– defensive debt,
– defensive spin-offs, etc.

Question 9

Timeline of an Event-Study

Answer 9