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34 Cards in this Set
- Front
- Back
A lower cost of information production by a firm can be achieved by: |
Economies of Scope |
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Conflicts of interest arise through the provision of several types of financial services because: |
The firm is serving groups with differing interest |
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Conflicts of interest can make financial markets less efficient through |
Reduction of quality information |
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Conflicts of interest arise in underwriting and research of investment banks: |
When an issuer benefits from optimistic research and investors desire unbiased research |
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How can conflicts of interest lead to unethical behavior |
Conflicts of interest generate incentives for service providers to lie or conceal information, thereby hurting the customers they work for |
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Conflicts of interest in the financial industry are a problem because: |
Misleading information is provided to customers hurting them and benefiting insiders in the industry |
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Growing economies of scope in the financial industry refers to: |
Firms offering more and varied types of services under one roof |
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Spinning is harmful to efficient financial markets because: |
It may raise the cost of capital to a firm |
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When auditors examine financial advice put in place by their counterparts from a different division of the accounting firm, |
The result can be biased audits and less reliable information |
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Some commentators have attributed the demise of Arthur Andersen to the combination of auditing and consulting activities in the firm. Is this assessment correct? |
No, a better explanation is that the Houston office succumbed to pressure to give favorable opinions about Enron because Enron was such a large client |
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A possible conflict of interest in credit rating agencies is: |
Issuers pay to have themselves rated |
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When an underwriting bank sells a firm's securities to the bank's other customers: |
The bank's ability to promote efficient credit allocation is impeded |
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"Conflicts of interest always reduce the flow of reliable information." True, False, or Uncertain? |
False. Conflicts of interest only reduce the flow of reliable information if they are exploited, and they will only be exploited if there is sufficient incentive to do so. |
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Which of the following is not an example of a conflict of interest that does not seem to have been exploited and thus did not lead to a reduction of reliable information in the financial markets? |
Credit-rating agencies seem to give accurate appraisals of credit risk even though they are paid by the firms that are issuing the securities |
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In which of the following situations is it more likely that conflicts of interest will be exploited? |
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A compensation scheme that pressures for revenues and profits from one division at the expense of another division has: |
Incentives to exploit conflicts of interest |
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Reputational rents are: |
Profits that the firm earns because it is trusted by the marketplace, but these can be diminished by conflicts of interest that harm the company's reputation |
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Markets are the best mechanism for minimizing conflicts of interest because they |
Can penalize offending firms in the form of lower product demand |
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Mandatory disclosure may only work well if: |
Firms cannot avoid the regulation The firm is not subject to the free rider problem It is low cost to the firm |
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The trade off between increasing degrees of separation and reduction of conflicts of interest is: |
Reduced economies of scope in information production |
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The Dodd-Frank legislation helps reduce conflicts of interest by: |
Prohibiting firms issuing asset-backed securities from shopping around for the highest ratings |
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By separating the ability to both audit a firm and provide consulting services contemporaneously, Sarbanes-Oxley |
Reduces conflicts of interest |
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"Sarbanes-Oxley significantly raises compliance costs for firms. Since it dramatically increases market inefficiency, it should be abolished." |
Sarbanes-Oxley legislation makes compliance costly, but it should reduce conflicts of interest and help to avoid accounting scandals. |
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Which of the following is NOT a beneficial provision of the Sarbanes-Oxley Act? |
Eliminates many mandatory forms and reporting standards, reducing the costs of compliance |
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Which of the following is not a disadvantage of the Sarbanes-Oxley Act |
Reduced criminal charges for criminal charges for white-collar crime and obstruction of official investigations |
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Which of the following is not a beneficial provision of the Global Legal Settlement |
Requires CEOs to certify the financial statements of the firm, which should improve the quality of information |
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Which of the following is the primary disadvantage of the Global Legal Settlement |
It separates activities and so may mean that economies of scope in information production are lost |
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How can supervisory oversight help reduce conflicts of interest |
A supervisory might have better access to information about whether a conflict of interest exists and is being exploited and can then take actions to stop it |
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Which of the following is an advantage of government provision as a solution to the problems created by conflicts of interest |
Since information is a public good, government provision may make markets more efficient |
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Which of the following is a disadvantage of government provision of information as a solution to the problems created by conflicts of interest? |
Governments often cannot afford to hire the best people so they may not provide high-quality information |
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Having compliance officers work on producing credit ratings presents a conflict of interest for all of the following reasons EXCEPT? |
Compliance officers can perform compliance analysis for clients and then refer clients to other professional service providers |
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A portion of the Global Legal Settlement prohibits spinning. This means that: |
Brokerage firms may not sell IPO shares to corporate executives who are in the position to greatly influence investment banking decisions |
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Reputational incentives to exploit conflicts of interest may exist: |
In the short run but no tin the long-run |
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One reason that the market may not be able to solve a conflict of interest problem is |
It cannot obtain information until too late |