Study Questions – MBAX 6200 (November 15, 2010)
1. Discuss the advantages and disadvantages of common stock residual claims. [jensen-
2. Discuss the sources of conflict of interest between managers and shareholders. Discuss
the mechanisms to control this conflict of interest. [jensen-smith.doc]
3. Target shareholders generally receive substantial positive abnormal returns during
takeovers. What are the hypothesized sources of these abnormal returns? What is the
empirical evidence on this? [target-gain.doc] [NewEvidenceMergers.ppt]
4. What is the empirical evidence on returns to bidders in takeovers? Discuss potential
problems in the traditional ways of measuring returns to bidders in takeovers. [b-
hirshleifer.ppt] [CEO-Overconfidence-Turnover.ppt] [NewEvidenceMergers.ppt]
5. (a) During the last decade corporations are said to be refocusing. What is meant by
“corporate refocusing”? Discuss why corporations might be refocusing; please consider
the evidence in Krishnaswami and Subramaniam (1999), Ahn and Denis (2004) and
Daley, et al (1997).
(b) What might be the role of market disciplinary forces, and internal governance
mechanisms in spurring corporate refocusing as discussed in Berger and Ofek (1999).
6. Recently academics, the stock exchanges, and industry advisors to institutional
investors have suggested ways to measure corporate governance for companies. Discuss
the role of independent directors and director stock ownership on corporate governance.
What is the empirical evidence on these issues? [b-black.ppt] [Corporate Governance-
7. Bebchuk, Cohen and Spamann (2010) study the compensation structure of the top
executives in Bear Stearns and Lehman Brothers and conclude, “…given the structure of
executives’ payoffs, the possibility that risk-taking decisions were influenced by
incentives should not be dismissed but rather taken seriously.”
Fahlenbrach and Stulz (2009) focus on the large losses experienced by CEOs of financial
institutions via the declines in the value of their ownership in their company’s stock and
stock option during the crisis and conclude, “Bank CEO incentives cannot be blamed for
the credit crisis or for the performance of banks during that crisis.”
(a) How might you differentiate between these two points of view?
(b) What recommendations might you make regarding executive compensation, and
capital structure of large financial institutions? Why?
8. Describe the capital markets' reaction to announcements of new security offerings.
Discuss the theories (optimal capital structure, implied changes in net operating cashflow,
information asymmetry, unanticipated announcement) that have been suggested to
understand this set of empirical facts. [raising-capital.ppt]
9. a. What are the advantages and disadvantages of the traditional ways of dealing with
risk in capital budgeting?
b. What is a real option? When is it more valuable to consider the real options related to a
capital budgeting project? [real-options.ppt]
10 Why are initial public offerings underpriced? Please be sure to discuss the theories
based on asymmetric information (both when the issuer is more informed than the
investor, and the investors are more informed than issuer), theories based on symmetric
information, and theories focusing on the allocation of IPO shares. [IPO.ppt]
11. (a) With the help of a numerical example explain the underinvestment problem. How
can a business avoid this problem? [underinvestment.doc]
(b) Kayhan and Titman (2007) find that prior stock returns have a very significant impact
on a firm’s capital structure. Why might this be the case? [CapitalStructure.ppt]
Please note: The Final Exam will consist of five questions drawn from the
You will be asked to answer three of these five questions. It is expected that
the answer to each question would take about 30 minutes.