The Agency Problems of Institutional Investors - Bebchuk, Lucian A., Alma Cohen, and Scott Hirst, 2017 Flashcards
How does a shift from “closet indexing” to a more concentrated ownership encourage active funds to engage in stewardship activities in their portfolio companies?
A) Concentrated ownership increases potential benefits from stewardship, making engagement more worthwhile.
B) Concentrated ownership reduces the ability to engage with firms.
C) Active funds avoid stewardship due to free-rider problems.
D) Index funds engage in more stewardship than concentrated active funds.
A
Are active funds becoming more or less risky due to the transition from closet indexing to more concentrated portfolios by active funds
A) Less risky, because concentrated portfolios diversify better.
B) More risky, because larger bets on fewer stocks increase exposure to firm-specific risks.
C) Neither more nor less risky, as active funds remain diversified.
D) Less risky, as concentrated ownership ensures more predictable returns.
B
What are some potential sources of agency problems in index funds?
A) Free-rider problem, cost of stewardship, and conflicts of interest.
B) Over-engagement in corporate governance, lack of diversification, and excessive trading.
C) Misalignment of incentives, high transaction costs, and excessive activism.
D) Short-term focus, excessive leverage, and low liquidity.
A
What problem do index fund managers face that prevents them from engaging more in portfolio company governance?
A) They bear the full cost of engagement but share the benefits with all investors.
B) They lack sufficient financial resources to engage.
C) They face regulatory barriers to stewardship activities.
D) They are not allowed to vote in shareholder meetings.
A
What is a primary reason investment managers may not act in the best interest of beneficial investors regarding stewardship?
A) They bear the full cost of stewardship activities but capture only a small fraction of the benefits.
B) Investment managers have full alignment with beneficial investors’ interests.
C) Fees charged by investment managers ensure strong incentives for stewardship.
D) Investment managers are legally barred from engaging in stewardship.
A
Why are activist hedge funds less afflicted by the agency problems that impact other investment managers?
A) They have high-powered incentives and often take concentrated positions, increasing their incentive to enhance value.
B) They focus on short-term stock movements, not governance.
C) They are smaller and less influential.
D) They cannot invest in equity securities, avoiding conflicts of interest.
A
What is the primary focus of the paper regarding agency problems of institutional investors?
A) The stewardship roles of investment managers in corporate governance.
B) The regulatory frameworks governing mutual funds.
C) The relationship between mutual fund managers and specific stocks.
D) The techniques used by hedge funds to increase portfolio value.
A
What is one systemic cost of the rise of index funds in corporate governance?
A) Index funds have poor incentives to engage in stewardship, potentially affecting governance adversely.
B) Index funds have drastically increased the costs of financial intermediation.
C) Index funds reduce market diversification.
D) Index funds excessively interfere in corporate governance.
A
How does the compensation structure of hedge funds differ from index funds regarding stewardship incentives?
A) Hedge funds use performance-based fees, encouraging active engagement.
B) Hedge funds avoid engagement, similar to index funds.
C) Index funds have stronger incentives to engage in governance.
D) Hedge funds rely on fixed management fees like index funds.
A
Why do mutual funds often avoid direct shareholder activism?
A) To maintain business ties with corporations.
B) Because their fiduciary duty prevents them from intervening.
C) Because activism conflicts with passive investment strategies.
D) Because they lack voting power.
A
What role does the free-rider problem play in discouraging index funds from stewardship?
A) Any improvements benefit all funds tracking the same index, not just the one making the effort.
B) Index funds face strict regulations preventing engagement.
C) Index funds already spend large amounts on stewardship.
D) The free-rider problem does not apply to index funds.
A
Why do some policymakers advocate for increased regulation of mutual fund fees?
A) To incentivize greater investment in stewardship activities.
B) To discourage corporate activism.
C) To reduce the influence of hedge funds.
D) To eliminate competition between investment funds.
A
