Chapter 33 - Governance and Corporate Control Around the World
CHAPTER 33
Governance and Corporate Control Around the World
Answers to Problem Sets
1.
a.
b.
c.
d.
e.
f.
U.K.; The U.S. market is the largest in the world, but the U.K. stock
market is larger as a percent of GDP.
U.K.; The U.S. market is the largest in the world, but the U.K. stock
market is larger as a percent of GDP.
Japan
Japan
Euro area
Japan
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2.
a.
b.
c.
False, as a percentage of GDP, direct holdings of equity by households
are much smaller in Japan than in the United States.
True
False, at least relative to Japan and Europe, nonfinancial corporations in
the United States hold less intercompany loans and trade credits as a
percentage of GDP.
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3.
A Japanese keiretsu is a network of companies with cross-holdings and numerous
interrelationships. These include long-standing relationships among the
companies in the keiretsu and between the companies and the bank that is often
associated with the keiretsu. The advantages of this form of organization include
the ability to obtain debt financing from the keiretsu’s bank or from other affiliated
financial institutions. Financing can also be obtained from other companies in the
keiretsu, avoiding the need for external financing. Keiretsus tend to have relatively
stable cash flows and are often able to resolve issues related to the financial distress
of a company in the keiretsu. A disadvantage of this form of organization is the
fact that outside shareholders have little, if any, influence on the companies in the
keiretsu. As a result, dividends are relatively low and takeovers are extremely rare.
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4.
Other financial intermediaries include insurance companies, mutual funds, and
pension funds. In Japan, banks provide relatively more financing than do other
financial intermediaries, while in the UK, other financial intermediaries provide
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Chapter 33 - Governance and Corporate Control Around the World
substantially more financing. In the U.S., banks are less important sources of
financing compared to financial intermediaries, and in Europe, financing
provided by banks and financing provided by other financial intermediaries are
approximately equal.
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5.
New industries seem to develop in market-based financial systems, such as the
U.S., while bank-based systems, such as Japan and Germany, seem to be
successful in sustaining established industries. The automobile industry, for
example, grew and developed in the U.S., but Japan and Germany have
sustained a competitive advantage in recent decades. As new industries or
products develop, there often appear to be several potential avenues for
development, each requiring significant amounts of financing before the eventual
industry leaders emerge. A bank-based system is not likely to provide this earlystage financing because of the uncertainty involved, but a market-based system
provides financing from numerous investors with different views regarding
prospects for development. Market-based systems also seem to be more
effective in eliminating declining firms and industries.
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6.
In most cases, maximizing shareholder value and maximizing societal value, are
harmonious. Shareholder returns coincide with satisfied employees and
customers. Therefore, managers with an obligation solely to shareholders may
act in much the same way as managers with a broader societal obligation.
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7.
a.
b.
c.
d.
e.
False, in Japan networks of companies are known as keiretsus.
False, dual-class equity grants one class with extra voting rights and
therefore control.
True
True
True
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8.
Answers will vary. Although shareholders interest align generally, there are
situations where controlling shareholder may be tempted to capture value by
extracting private benefits at other shareholders’ expense, for example with
tunneling resources out of the firm.
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Chapter 33 - Governance and Corporate Control Around the World
9.
A company with dual-class equity has two classes of common stock with
different voting rights. For example, one class may receive 10 votes per share.
One of the best-known examples of a company with dual-class equity is Google:
the founders own a class of common stock with extra voting rights, which makes
it easier for them to maintain control over the firm. Some may dislike this
unequal voting power. Others may be perfectly comfortable with the
arrangement, as long as the terms are openly disclosed (and presumably priced
into the shares at issuance).
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10.
In market-based financial systems, where protection for outside investors is
generally good, there is little need for a controlling blockholder to form internal
markets through conglomeration. However in many developing economies, this
type of ownership is common as it allows for diversification through internal
markets and political power in countries where laws and regulations are enforced
erratically.
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11.
The shareholder holds .3 of X2. Company X2 then has a .3 holding in X, which
has a .3 holding in Z. The shareholder really has only a .33, or .027, holding in Z.
However, the shareholder has gained effective control of Z without holding the
shares directly.
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12.
Pyramids allow a wealthy family, for example, to control a group of companies
with a relatively small investment. This allows the family to diversify their
holdings while maintaining control of the group. In the U.S., investors can
diversify their holdings in the financial markets, so a pyramid or a conglomerate
is not necessarily a desirable alternative. In developing countries, however, the
substandard financial markets do not provide a desirable mechanism for
diversification and expansion.
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13.
No. Individual investors hold relatively little common stock directly. Also the crossholdings of stock by Japanese companies limit the opportunities for individuals to
play an important role in governance.
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14.
German banks have often had large shareholdings in industrial companies and
also hold proxies to vote those shares that they hold in safekeeping for individual
and institutional investors.
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Chapter 33 - Governance and Corporate Control Around the World
Est. Time: 01 – 05
15.
German firms have two boards of directors: a management board and a
supervisory board. The management board operates the company and is elected
by the supervisory board. Half of the supervisory board’s members are elected
by employees. The other half represents stockholders and often includes bank
executives. The supervisory board represents the interests of the company as a
whole, not just the interests of employees or stockholders.
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16.
If Company Y has a large stake in Company X, it may be able to transfer value
from X by borrowing from X at a low interest rate, selling materials to X at
excessive prices, or buying X’s output at low prices. Concentrated control of a
company can lead to the tunneling of resources out of the firm at the expense of
minority shareholders.
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17.
a.
While it is true that managers have a fiduciary duty to shareholders, it
is human nature for managers to put their own interests ahead of
those of the stockholders when there is a conflict in objectives. It is
impossible for stockholders to monitor the actions of all managers at
all times, so agency problems are inevitable.
b.
The types of mechanisms used to keep agency problems under
control generally involve monitoring of management (by boards of
directors, banks, and other financial intermediaries), contracts that
relate management compensation to firm performance, and market
mechanisms such as takeover threats and competition in the market
for managerial employees. Laws and regulations, including disclosure
requirements and accounting standards, can also keep agency
problems under control.
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18.
Transparency is essential in a market-based system, but is not necessarily a
requirement for a bank-based system. In a bank-based system, banks have
long-standing working relationships with the companies seeking financing, and
banks have ongoing access to information about the firm. In a market-based
system, creditors and equity-holders require that financial information about
companies seeking financing be available, sufficiently detailed, and accurate if
they are to participate in the market. This information, including audited financial
statements, allows participants in the market to make judgments about a firm’s
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McGraw-Hill Education.
Chapter 33 - Governance and Corporate Control Around the World
profitability and prospects for the future. Without this information, investors are
not willing to participate in the financial markets.
Est. Time: 06 – 10
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McGraw-Hill Education.