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6. Anti-takeover amendments can be in the best interests of stockholders. Under what
conditions is this likely to be true?

7. Companies outside the United States often have two classes of stock outstanding. One
class of shares is voting and is held by the incumbent managers of the firm. The other
class is non-voting and represents the bulk of traded shares. What are the consequences
for corporate governance?

8. In recent year, top managers have been given large packages of options, giving them
the right to buy stock in the firm at a fixed price. Will these compensation schemes make
managers more responsive to stockholders? Why or why not? Are lenders to the firm
affected by these compensation schemes?

9. Reader™s Digest has voting and non-voting shares. About 70% of the voting shares are
held by charitable institutions, which are headed by the CEO of Reader™s Digest. Assume
that you are a large holder of the non-voting shares. Would you be concerned about this
set-up? What are some of the actions you might push the firm to take to protect your

10. In Germany, large banks are often large lenders and large equity investors in the same
firm. For instance, Deutsche Bank is the largest stockholder in Daimler Chrysler, as well
as its largest lender. What are some of the potential conflicts that you see in these dual

11. It is often argued that managers, when asked to maximize stock price, have to choose
between being socially responsible and carrying out their fiduciary duty. Do you agree?
Can you provide an example where social responsibility and firm value maximization go
hand in hand?

12. Assume that you are advising a Turkish firm on corporate financial questions, and
that you do not believe that the Turkish stock market is efficient. Would you recommend
stock price maximization as the objective? If not, what would you recommend?

13. It has been argued by some that convertible bonds (i.e., bonds which are convertible
into stock at the option of the bondholders) provide one form of protection against
expropriation by stockholders. What is this argument based on?

14. Societies attempt to keep private interests in line by legislating against behavior that
might create social costs (such as polluting the water). If the legislation is comprehensive
enough, does the problem of social costs cease to exist? Why or why not?

15. One of the arguments made for having legislation restricting hostile takeovers is that
unscrupulous speculators may take over well run firms and destroy them for personal
gain. Allowing for the possibility that this could happen, do you think that this is
sensible? If so, why? If not, why not?

Live Case Study
I. Corporate Governance Analysis
Objective: To analyze the corporate governance structure of the firm and to assess where
the power in the firm lies “ with incumbent management or with stockholders in the

Key Questions:
Is this a company where there is a separation between management and ownership? If

so, how responsive is management to stockholders?
Is there a potential conflict between stockholders and lenders to the firm? If so, how

is it managed?
How does this firm interact with financial markets? How do markets get information

about the firm?
How does this firm view its social obligations and manage its image in society?

Framework for Analysis:
1. The Chief Executive Officer
Who is the CEO of the company? How long has he or she been CEO?

If it is a “family run” company, is the CEO part of the family? If not, what

career path did the CEO take to get to the top? (Did he or she come from
within the organization or from outside?)
How much did the CEO make last year? What form did the compensation

take? (Salary, bonus and option components)
How much stock and options in the company does the CEO own?

2. The Board of Directors
Who is on the board of directors of the company? How long have they served

as directors?
How many of the directors are “inside” directors?

How many of the directors have other connections to the firm (as suppliers,

clients, customers..)?
How many of the directors are CEOs of other companies?

Do any of the directors have large stockholdings or represent those who do?


3. Bondholder Concerns
Does the firm have any publicly traded debt?

Are there are bond covenants (that you can uncover) that have been imposed

on the firm as part of the borrowing?
Do any of the bonds issued by the firm come with special protections against

stockholder expropriation?
4. Financial Market Concerns
How many analysts follow the firm?

How much trading volume is there on this stock?

5. Societal Constraints
What does the firm say about its social responsibilities?

Does the firm have a particularly good or bad reputation as a corporate

If it does, how has it earned this reputation?

If the firm has been a recent target of social criticism, how has it responded?

Information Sources:
For firms that are incorporated in the United States, information on the CEO and
the board of directors is primarily in the filings made by the firm with the Securities and
Exchange Commission. In particular, the 14-DEF will list out the directors in the firm,
their relationship with the firm and details on compensation for both directors and top
managers. You can also get information on trading done by insiders from the SEC filings.
For firms that are not listed in the United States, this information is much more difficult
to obtain. However, the absence of readily accessible information on directors and top
management is more revealing about the power that resides with incumbent managers.
Information on a firm™s relationships with bondholders usually resides in the
firm™s bond agreements and loan covenants. While this information may not always be
available to the public, the presence of constraints shows up indirectly in the firm™s bond
ratings and when the firm issues new bonds.
The relationship between firms and financial markets is an uneasy one. The list of
analysts following a firm can be obtained from publications such as the Nelson Directory

of Securities Research. For larger and more heavily followed firms the archives of
financial publications (the Financial Times, Wall Street Journal, Forbes, Barron™s) can be
useful sources of information.
Finally, the reputation of a firm as a corporate citizen is the toughest area to
obtain clear information on, since it is only the outliers (the worst and the best corporate
citizens) that make the news. The proliferation of socially responsible mutual funds,
however, does give us a window on those firms that pass the tests (arbitrary, though they
sometimes are) imposed by these funds for a firm to be viewed as “socially responsible”.
Online sources of information:


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