Chapter 15

Front 1

A lower cost of information production by a firm can be achieved by:

Back 1

Economies of Scope

Front 2

Conflicts of interest arise through the provision of several types of financial services because:

Back 2

The firm is serving groups with differing interest

Front 3

Conflicts of interest can make financial markets less efficient through

Back 3

Reduction of quality information

Front 4

Conflicts of interest arise in underwriting and research of investment banks:

Back 4

When an issuer benefits from optimistic research and investors desire unbiased research

Front 5

How can conflicts of interest lead to unethical behavior

Back 5

Conflicts of interest generate incentives for service providers to lie or conceal information, thereby hurting the customers they work for

Front 6

Conflicts of interest in the financial industry are a problem because:

Back 6

Misleading information is provided to customers hurting them and benefiting insiders in the industry

Front 7

Growing economies of scope in the financial industry refers to:

Back 7

Firms offering more and varied types of services under one roof

Front 8

Spinning is harmful to efficient financial markets because:

Back 8

It may raise the cost of capital to a firm

Front 9

When auditors examine financial advice put in place by their counterparts from a different division of the accounting firm,

Back 9

The result can be biased audits and less reliable information

Front 10

Some commentators have attributed the demise of Arthur Andersen to the combination of auditing and consulting activities in the firm. Is this assessment correct?

Back 10

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

Front 11

A possible conflict of interest in credit rating agencies is:

Back 11

Issuers pay to have themselves rated

Front 12

When an underwriting bank sells a firm's securities to the bank's other customers:

Back 12

The bank's ability to promote efficient credit allocation is impeded

Front 13

"Conflicts of interest always reduce the flow of reliable information."

True, False, or Uncertain?

Back 13

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.

Front 14

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?

Back 14

Credit-rating agencies seem to give accurate appraisals of credit risk even though they are paid by the firms that are issuing the securities

Front 15

In which of the following situations is it more likely that conflicts of interest will be exploited?

Back 15

When the market cannot get information about whether an exploitation of a conflict of interest is occurring.

Front 16

A compensation scheme that pressures for revenues and profits from one division at the expense of another division has:

Back 16

Incentives to exploit conflicts of interest

Front 17

Reputational rents are:

Back 17

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

Front 18

Markets are the best mechanism for minimizing conflicts of interest because they

Back 18

Can penalize offending firms in the form of lower product demand

Front 19

Mandatory disclosure may only work well if:

Back 19

Firms cannot avoid the regulation

The firm is not subject to the free rider problem

It is low cost to the firm

Front 20

The trade off between increasing degrees of separation and reduction of conflicts of interest is:

Back 20

Reduced economies of scope in information production

Front 21

The Dodd-Frank legislation helps reduce conflicts of interest by:

Back 21

Prohibiting firms issuing asset-backed securities from shopping around for the highest ratings

Front 22

By separating the ability to both audit a firm and provide consulting services contemporaneously, Sarbanes-Oxley

Back 22

Reduces conflicts of interest

Front 23

"Sarbanes-Oxley significantly raises compliance costs for firms. Since it dramatically increases market inefficiency, it should be abolished."

Back 23

Sarbanes-Oxley legislation makes compliance costly, but it should reduce conflicts of interest and help to avoid accounting scandals.

Front 24

Which of the following is NOT a beneficial provision of the Sarbanes-Oxley Act?

Back 24

Eliminates many mandatory forms and reporting standards, reducing the costs of compliance

Front 25

Which of the following is not a disadvantage of the Sarbanes-Oxley Act

Back 25

Reduced criminal charges for criminal charges for white-collar crime and obstruction of official investigations

Front 26

Which of the following is not a beneficial provision of the Global Legal Settlement

Back 26

Requires CEOs to certify the financial statements of the firm, which should improve the quality of information

Front 27

Which of the following is the primary disadvantage of the Global Legal Settlement

Back 27

It separates activities and so may mean that economies of scope in information production are lost

Front 28

How can supervisory oversight help reduce conflicts of interest

Back 28

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

Front 29

Which of the following is an advantage of government provision as a solution to the problems created by conflicts of interest

Back 29

Since information is a public good, government provision may make markets more efficient

Front 30

Which of the following is a disadvantage of government provision of information as a solution to the problems created by conflicts of interest?

Back 30

Governments often cannot afford to hire the best people so they may not provide high-quality information

Front 31

Having compliance officers work on producing credit ratings presents a conflict of interest for all of the following reasons EXCEPT?

Back 31

Compliance officers can perform compliance analysis for clients and then refer clients to other professional service providers

Front 32

A portion of the Global Legal Settlement prohibits spinning. This means that:

Back 32

Brokerage firms may not sell IPO shares to corporate executives who are in the position to greatly influence investment banking decisions

Front 33

Reputational incentives to exploit conflicts of interest may exist:

Back 33

In the short run but no tin the long-run

Front 34

One reason that the market may not be able to solve a conflict of interest problem is

Back 34

It cannot obtain information until too late