20 Mark Questions Flashcards
1
Q
Critically evaluate agency theory as a lease for examining corporate governance
A
- definition of corporate governance
- core assumptions of agency theory:
- bounded rationality
- risk adverse agents
- risk neutral principles
- utility maximisers
- self- interested - Alignment of interests
- Association to shareholder and stakeholder models
- Explanation of the tools of corporate governance and agency costs
2
Q
Critically examine the assumptions of the individual economic agent within the context of perfect markets
A
- Definition of utility theory in relation to market participation behaviour
- rational
- self-interest
- utility maximiser
- homogenous
- risk adverse - If hold in reality?
- Traditional assumptions
3
Q
Critically discuss the differences between bond and equity financial contracts within the context of the modern financial markets
A
- Define bond contract
- can be long and short term financial contracts
- less than 12 or more than 12 in maturity
- can be issued by both corporations and governments
- bonds are normally issued via an outright auction but the process of syndication is also used
- if used as a source of finance there is no ‘loss’ of ownership
- potential tax shields to using bonds as source of finance
- potential indicator of short term and long term interest rates if issued by governments - Definition of equity contracts
- long term financial contracts
- more than 12months in maturity
- issued within the capital markets
- several types of issues of equity contracts
- several types of equity contracts: ordinary shares and preference shares - Brief overview of current state of bond market
- Brief overview of the current state of equity market
4
Q
Critically evaluate the concept of corporate governance and the mechanisms by which modern financial institutions can use mitigation issues of corporate governance
A
- Definition of corporate governance
- how align interests
- explanation of tools of corporate governance
- self-interested - Break down of principle agent relationship
- examine alignment of interests between these two parties - Discussion of the mechanisms that institutions can adopt in order to facilitate this alignment
- independent members of the board
- CEO- chair duality
- AGMs
- CEO remuneration packages
- external audits
- monitoring exercises
5
Q
Critically compare the difference between the money markets and the capital markets. Reference to current state of money and capital markets.
A
- Definition of money markets
- short term financial contracts
- less than 12 months in maturity
- predominantly in the form of short term bonds issued by both corporations and governments
- potential indicator of short term interest rates - Definition of capital markets
- long term financial contracts
- more than 12 months in maturity
- within the capital markets is where equity contracts are issued along with long term government and corporate bonds - Brief overview of current state of money market
- Brief overview of current state of capital markets
6
Q
Critically evaluate the underlying assumptions grounding a perfect efficient market
A
- Definition of Arrow- Debreu conditions about the marketplace
- many buyers and sellers
- no barriers to entry or exit
- no taxation
- perfect information - Definition of the assumptions of utility in relation to market participant behaviour
- rational
- self- interested
- utility maximiser
- homogenous
- risk-adverse
7
Q
Critically consider the nuances of corporate governance between the shareholder and stakeholder model firm. Utilise agency theory as a means of conceptualising corporate governance in this instance
A
- Definition of corporate governance
- Critical discussion of corporate governance within context of shareholder and stakeholder models
- Core assumptions of agency theory
- Bounded rationality
- risk adverse agents
- risk neutral principals
- utility maximisers
- self-interested - Alignment of both parties are self interested how do they align these interests
- Explanation of tools of corporate governance and agency theory costs
8
Q
Explain by what is meant by the term ‘efficient capital market’ and discuss to what extent exchanges are considered efficient.
A
- Definition
- Assumptions concerning the market in terms of market efficiency
- many buyers and many sellers
- low transaction costs
- low taxation
- few barriers to entry and exit
- information efficiency (weak form, semi strong form, strong form)
- > debate and discuss in relation to equity markets
9
Q
Critically discuss the differences between capital and money markets. Reference to current state of the capital and money markets
A
- Definition of bond contracts
- can be long and short term financial contract
- less than 12 or more than 12 months in maturity
- can be issued by both corporations and governments
- bonds are normally issued via an outright auction but the process of syndication is also used
- if used as a source of finance there is no loss of ownership
- potential tax shields to using bonds as a source of finance
- potential indicator of short term and long term interest rates if issued by governments - Definition of equity contracts
- long term financial contracts
- more than 12 months within the capital markets
- several types of issues of equity contracts
- several types of equity contract: ordinary shares, preference shares - Brief overview of current state of the bond markets
- Brief overview of current state of the equity markets
10
Q
Critically evaluate the mechanisms available to firms in addressing issues of corporate governance
A
- Definition of corporate governance
- internal mechanisms
- BDO characteristics
* ceo chair duality
* external members
* tenureship
- BDO remuneration
- CEO remuneration
- BOD qulification
- degree of ownership - Internal mechanisms
- market for good corporate governance
- government legislation
11
Q
Critically discuss the differences between the traditional financial assumptions of perfect markets with that of behavioural finance
A
- Definition of Arrow- Debreu conditions about the market place
- many buyers and sellers
- no barriers to entry or exit
- no taxation
- perfect information - Definition of the assumptions of utility theory in relation to the market participant behaviour
- rational
- self-interested
- utility maximiser
- homogenous
- risk- adverse - Behavioural finance assumptions
- grounded in psychology and behaviour with cognitive making
* emotions
* deviations from rationality
* cognitive biases (behavioural finance assumes are patterns)
- two models of behavioural finance
* representative agents
* noise traders
12
Q
Critically discuss the difference between equity and foreign exchange markets. Reference to current state of equity and foreign exchange markets.
A
- Definition of equity markets
- long term financial contracts
- more than 12months in maturity
- issued within the capital markets
- several types of issues of equity contracts.
- several types of equity contract: ordinary shares, preference shares - Definition of foreign exchange markets
- not used for raising finance at corporate level but used predominantly for engaging in international trade
- foreign exchange markets are not locked to a locale and every market that offers a currency pair is the market for said currency pair
- clear relationships between exchange rates and inflation and interest rate differentials - Brief overview of current state of the bond markets
- Brief overview of current state of the equity markets
13
Q
Critically examine the mechanisms of corporate governance utilising agency theory as a theoretical framework for analysis
A
- Definition
- Internal mechanisms
- BOD characteristics
* CEO chair duties
* external members
* tenureship
- BOD remunerations
- CEO remunerations
- BOD qualifications
- degree of ownership - External mechanisms
- market for good corporate governance
- government legislation - Alignment
- Break down principal-agency relationship
- Association to shareholder and stakeholder model
- Explanation of tools of corporate governance and agency costs
14
Q
Critically explore the concept of efficient markets and discuss to what extent financial markets such as the equity and foreign exchange markets are informationally efficient.
A
- Market efficiency
- many buyers and many sellers
- low transaction costs
- low taxation
- few barriers to entry and exit
- information efficiency
* weak form
* semi-strong form
* strong form - Definition of assumptions of utility theory in relation to market behaviour
- rational
- self interested
- utility maximiser
- homogenous
- risk adverse - Debate these in relation to if the markets are efficient
- Bring in behavioural finance conceptions
15
Q
Critically contrast between the equity and debt markets.
A
- Both contracts issued within the primary markets
- Equity contracts
- IPO
- exchange listed or OTC - Bond contracts
- auction or syndication
- both corporate and government bonds - Definition of equity contracts
- long term financial contracts
- more than 12 months in maturity
- issued within the capital markets
- several types of issued of equity contracts. Either via IPO or rights issue
- several types of equity contract, ordinary shares and preference shares - Definition of bond contract
- can be both long and short term financial contracts
- less than 12 or more than 12 months in maturity
- can be issued by both corporations and governments
- bonds are normally issued via an outright auction but the process of syndication is also used
- if used as a source of finance there is no loss of ownership
- potential tax shields to using bonds as a source of finance
- potential indicator of short term and long term interest rates if issued by governments - Current overview of state of markets
