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Multiple Choice Quiz
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1
Setting a rational contract in a firm involves
A)Offering the employee a contract that is at least as good as his next best alternative
B)Setting the differential between the carrot and stick part of the contract to induce the employee to represent the interests of the shareholders properly
C)Not being unduly generous to the employee
D)All of the above
E)None of the above
2
In practice, typical compensation contracts for CEOs
A)Are highly variable depending on performance
B)Are too strongly geared towards the stick part of the contract with penalties such as dismissal for bad performance
C)Are well-aligned towards shareholder interests
D)Both a and c are correct
E)None of the above
3
Typically firms with stronger shareholder rights have
A)Higher firm values
B)Lower sales growth
C)Higher profits but lower earnings per share
D)All of the above
E)Similar values as other firms
4
When setting compensation policies for CEOs, overconfident directors
A)Are experts in compensation and thus overestimate their own abilities to manage CEO pay issues
B)Do not understand that managers are prone to self-attribution biases, taking credit for good outcomes while resisting lower pay for poor performance
C)Believe that all managers are above average
D)Both a and b are correct
E)Both b and c are correct
5
The casino effect in managerial compensation arises when
A)Overconfident managers overvalue their firms and hence overvalue the options they are granted
B)Managers believe that their options are free money that they can spend freely
C)Managers overweight the small probability of an option being in the money
D)All of the above
E)None of the above
6
According to prospect theory
A)People tend to be risk averse when facing only gains
B)People tend to be risk loving when facing only losses
C)Overweight low probability events
D)All of the above
E)Only a and b are correct
7
Managers behave unethically
A)Only when they are intrinsically bad people
B)When they have high ambitions coupled with aversion to a sure loss
C)Only when they cannot exercise self control in seeking immediate gains
D)All of the above
E)None of the above
8
Auditors may not be able to audit firms and offer clean opinions on the integrity of the financial statements because
A)They are paid by the firm and hence subject to conflicts of interest
B)They are not experts in the ins and outs of firm details
C)They are not insiders like the management
D)All of the above
E)None of the above
9
Factors that may prevent agency conflicts between the auditor and the shareholders include
A)The auditor’s partners being personally responsible for the actions of their firms
B)The reputation of the firm suffering after poor audits
C)Auditors with good reputations also charging higher fees to signal the quality of the audit
D)All of the above
E)None of the above





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