117 Questions
True or false: The payout of cash to shareholders creates a major agency problem between shareholders and managers of the firm.
True
True or false: Free cash flow is cash flow in excess of that required to fund all projects that have positive net present values.
True
True or false: Managers are reluctant to payout cash because it reduces their power.
True
True or false: Conflicts of interest between shareholders and managers over payout policies are especially severe when the firm generates substantial free cash flow.
True
Free cash flow problem should be more severe when agency problems are severe
True
Market value of cash may be higher than its book value
False
Firms may be reluctant to pay cash dividends
True
More stringent governance reduces the free cash flow problem
True
Managers of firms with large free cash flows are more likely to undertake value-destroying M&As
True
Empire building stems from differences in preferences between investors and executives
True
Empire building is less likely if managers are less accountable to the firm’s investors
False
Financial reporting is not an important means of monitoring managers to make them more accountable
False
Unwarranted growth together with reduced profitability is a good sign for owners
False
Many studies show how managerial traits do not affect various corporate decisions and key business outcomes
False
Corporate governance problem does not affect managerial traits and corporate decisions
False
Firms may use excess cash to unprofitable acquisitions
True
Managers' personal traits do not have any impact on their decision-making process.
False
Altman's model and Ohlson's model use financial ratios to predict future financial distress of a firm.
True
Liquidity and working capital are weak signals of anticipated distress according to traditional distress prediction models.
False
Adding managers' credit default information to distress prediction models does not provide any incremental role in predicting financial distress.
False
Defaulting CEOs and directors have no significant difference in proportion between distress and non-distress firms.
False
Theoretical reasoning is based on literatures related to managerial traits and financial distress.
True
Managers' personal credit defaults reflect the same personal traits that affect corporate decisions, which may lead a firm into financial distress.
True
Overconfidence, optimism, the illusion of control, and sensation-seeking affect consumption attitudes and resulting saving and borrowing decisions.
True
Managers' personal traits play an important role in key managerial decisions such as capital structure, investment, and M&A decisions.
True
CEO overconfidence has no impact on the market's reaction to acquisitions.
False
Upper echelons theory suggests that the organization reflects its top managers.
True
Agency costs of free cash flow, corporate finance, and takeovers are not related to managerial traits.
False
Overconfident managers tend to underestimate their ability to generate returns in mergers and acquisitions (M&As), leading to overpayment for target companies and value-destroying mergers.
False
Malmendier and Tate (2008) use CEO's personal over-investment in the firm and press portrayals as measures of CEO overconfidence.
True
Overconfident CEOs are less likely to make an acquisition, particularly if the merger is diversifying and does not require external financing.
False
The stock market reaction at merger announcements for overconfident CEOs is significantly more positive than for non-overconfident CEOs.
False
Appointing CEOs and directors with past personal payment default entries increases the likelihood of financial distress of the firm.
True
The Hubris Hypothesis of M&As suggests that managers in acquiring firms may pay too much for their targets due to valuation errors.
True
Roll's steps in the M&A process include identifying a potential target, undertaking a valuation, and comparing the value to the current market price.
True
Sensation-seeking managers may take risks for the thrill rather than the expected utility, which can impact their decision-making.
True
Managerial experiences, values, and cognitive styles have no impact on corporate decisions and are not considered in corporate governance.
False
True or false: The payout of cash to shareholders creates a major agency problem between shareholders and managers of the firm.
True
True or false: Free cash flow is cash flow in excess of that required to fund all projects that have positive net present values.
True
True or false: Conflicts of interest between shareholders and managers over payout policies are especially severe when the firm generates substantial free cash flow.
True
True or false: Managers are reluctant to payout cash because it reduces their power.
True
Managers' personal credit defaults reflect the same personal traits that affect corporate decisions, which may lead a firm into financial distress
True
Traditional distress prediction models use financial ratios that are likely to predict future financial distress of the firm
True
Profitability is a strong signal of anticipated distress according to traditional distress prediction models
False
Liquidity and working capital are strong signals of anticipated distress according to traditional distress prediction models
True
Defaulting CEOs and directors have no significant difference in proportion between distress and non-distress firms
False
CEO personal and corporate leverage show behavioral consistency in corporate finance
True
CEO overconfidence has been found to affect corporate policies
True
Managers' personal traits play an important role in key managerial decisions such as capital structure, investment, and M&A decisions
True
Adding managers' credit default information to distress prediction models does not provide any incremental role in predicting financial distress
False
Agency costs of free cash flow, corporate finance, and takeovers are not related to managerial traits
False
Managers of firms with large free cash flows are more likely to undertake value-destroying M&As
True
Overconfidence, optimism, the illusion of control, and sensation-seeking affect consumption attitudes and resulting saving and borrowing decisions
True
Managers' personal wealth invested in a firm does not influence the value of free cash flow according to Zerni, Kallunki and Nilsson (2011)
False
Zerni, Kallunki and Nilsson (2011) found that dividend pay-out ratios increase with the portion of personal wealth that board members and main owners have invested in a firm
True
The free cash flow problem predicts that mergers and acquisitions motivated by diversification of business operations are less likely to involve resource waste
True
Empire building is more likely when managers are more accountable to the firm's investors
False
Managers' behavioral biases do not affect various corporate decisions according to many studies
False
Unwarranted growth together with reduced profitability is a good sign for owners according to the text
False
Managers' personal traits do not have any impact on their decision-making process according to the text
False
Financial reporting is an important means of monitoring managers to make them more accountable according to the text
True
Managers of firms with large free cash flows are more likely to undertake value-destroying M&As according to the text
True
More stringent governance reduces the free cash flow problem according to the text
True
Free cash flow problem should be less severe when agency problems are severe according to the text
False
Market value of cash may be higher than its book value according to the text
False
Managers' overconfidence can lead to overpayment for target companies and value-destroying mergers.
True
Malmendier and Tate (2008) use CEO's personal over-investment in the firm and press portrayals as measures of CEO overconfidence.
True
Overconfident CEOs are more likely to make an acquisition, especially if the merger is diversifying and does not require external financing.
True
The stock market reaction at merger announcements for overconfident CEOs is significantly more positive than for non-overconfident CEOs.
False
There is a positive relation between CEOs' personal home leverage and corporate leverage.
True
Appointing CEOs and directors with past personal payment default entries increases the likelihood of financial distress of the firm.
True
Roll's steps in the M&A process include identifying a potential target, undertaking a valuation, and comparing the value to the current market price.
True
Sensation-seeking managers may take risks for the thrill rather than the expected utility, which can impact their decision-making.
True
Managers' personal traits, such as honesty and cognitive styles, do not need to be matched with their tasks to mitigate the agency problem.
False
Managerial experiences, values, and cognitive styles have no impact on corporate decisions and are not considered in corporate governance.
False
Overconfident CEOs are less likely to make an acquisition, particularly if the merger is diversifying and does not require external financing.
False
The Hubris Hypothesis of M&As suggests that managers in acquiring firms may pay too much for their targets due to valuation errors.
True
Managers are generally eager to payout cash to shareholders because it reduces their power.
False
Free cash flow is cash flow in excess of that required to fund all projects that have positive net present values.
True
Conflicts of interest between shareholders and managers over payout policies are especially severe when the firm generates substantial free cash flow.
True
More stringent governance reduces the free cash flow problem according to the text.
True
Managers with large free cash flows are less likely to undertake value-destroying M&As according to the text.
False
Managers may be reluctant to pay high dividends according to the text.
True
The free cash flow problem predicts that managers of firms with large free cash flows and unused borrowing power are more likely to undertake low-benefit or even value-destroying M&As.
True
Empire building is more likely if managers are more accountable to the firm’s investors according to the text.
False
Financial reporting is not an important means of monitoring managers to make them more accountable according to the text.
False
Managers' behavioral biases do not affect various corporate decisions according to the text.
False
The value of free cash flow increases with the portion of personal wealth that board members have invested in a firm according to Zerni, Kallunki and Nilsson (2011).
True
Managers' personal traits, such as honesty and cognitive styles, do not have an impact on corporate decisions and are not considered in corporate governance according to the text.
False
Managers are reluctant to payout cash because it reduces their power according to the text.
True
Unwarranted growth together with reduced profitability is a good sign for owners according to the text.
False
Market value of cash may be higher than its book value according to the text.
False
Adding managers' credit default information to distress prediction models does not provide any incremental role in predicting financial distress according to the text.
False
Managers' personal traits, such as honesty and cognitive styles, do not need to be matched with their tasks to mitigate the agency problem.
False
Managers of firms with large free cash flows are more likely to undertake value-destroying M&As according to the text
True
Adding managers' credit default information to distress prediction models does not provide any incremental role in predicting financial distress.
False
Defaulting CEOs and directors have no significant difference in proportion between distress and non-distress firms.
False
Market value of cash may be higher than its book value according to the text
True
Empire building is less likely if managers are less accountable to the firm’s investors.
False
Unwarranted growth together with reduced profitability is a good sign for owners according to the text
False
CEO personal and corporate leverage show behavioral consistency in corporate finance.
True
More stringent governance reduces the free cash flow problem according to the text
False
The free cash flow problem predicts that mergers and acquisitions motivated by diversification of business operations are less likely to involve resource waste.
False
Managers' behavioral biases do not affect various corporate decisions according to many studies
False
Altman's model and Ohlson's model use financial ratios to predict future financial distress of a firm.
True
Managers' personal credit defaults reflect the same personal traits that affect corporate decisions, which may lead a firm into financial distress.
True
Adding managers' credit default information to distress prediction models does not provide any incremental role in predicting financial distress.
False
Defaulting CEOs and directors have a significant difference in proportion between distress and non-distress firms.
True
Theoretical reasoning is based on literatures related to managerial traits and financial distress.
True
Overconfident CEOs are more likely to make an acquisition, especially if the merger is diversifying and does not require external financing.
False
Market value of cash may be higher than its book value according to the text.
True
Many studies show how managerial traits do not affect various corporate decisions and key business outcomes.
False
Unwarranted growth together with reduced profitability is a good sign for owners according to the text.
False
Overconfident CEOs are less likely to make an acquisition, particularly if the merger is diversifying and does not require external financing.
False
Managers' personal traits, such as honesty and cognitive styles, do not need to be matched with their tasks to mitigate the agency problem.
False
Zerni, Kallunki and Nilsson (2011) found that dividend pay-out ratios increase with the portion of personal wealth that board members and main owners have invested in a firm.
True
Agency costs of free cash flow, corporate finance, and takeovers are not related to managerial traits.
False
Study Notes
Managerial Traits and Corporate Decision-Making
- Behavioral biases of managers, such as overconfidence and sensation seeking, can significantly impact corporate decision-making.
- Overconfident managers tend to overestimate their ability to generate returns in mergers and acquisitions (M&As), leading to overpayment for target companies and value-destroying mergers.
- Malmendier and Tate (2008) use CEO's personal over-investment in the firm and press portrayals as measures of CEO overconfidence.
- Overconfident CEOs are 65% more likely to make an acquisition, particularly if the merger is diversifying and does not require external financing.
- The stock market reaction at merger announcements for overconfident CEOs is significantly more negative than for non-overconfident CEOs.
- Overconfident CEOs use more debt and issue new debt more often, and there is a positive relation between CEOs' personal home leverage and corporate leverage.
- Appointing CEOs and directors with past personal payment default entries increases the likelihood of financial distress of the firm.
- The Hubris Hypothesis of M&As suggests that managers in acquiring firms may pay too much for their targets due to valuation errors.
- Roll's steps in the M&A process include identifying a potential target, undertaking a valuation, and comparing the value to the current market price.
- Managers' personal traits, such as honesty and cognitive styles, need to be matched with their tasks to mitigate the agency problem.
- Sensation-seeking managers may take risks for the thrill rather than the expected utility, which can impact their decision-making.
- Managerial experiences, values, and cognitive styles can affect corporate decisions and need to be considered in corporate governance.
Managerial Traits and Corporate Decision-Making
- Behavioral biases of managers, such as overconfidence and sensation seeking, can significantly impact corporate decision-making.
- Overconfident managers tend to overestimate their ability to generate returns in mergers and acquisitions (M&As), leading to overpayment for target companies and value-destroying mergers.
- Malmendier and Tate (2008) use CEO's personal over-investment in the firm and press portrayals as measures of CEO overconfidence.
- Overconfident CEOs are 65% more likely to make an acquisition, particularly if the merger is diversifying and does not require external financing.
- The stock market reaction at merger announcements for overconfident CEOs is significantly more negative than for non-overconfident CEOs.
- Overconfident CEOs use more debt and issue new debt more often, and there is a positive relation between CEOs' personal home leverage and corporate leverage.
- Appointing CEOs and directors with past personal payment default entries increases the likelihood of financial distress of the firm.
- The Hubris Hypothesis of M&As suggests that managers in acquiring firms may pay too much for their targets due to valuation errors.
- Roll's steps in the M&A process include identifying a potential target, undertaking a valuation, and comparing the value to the current market price.
- Managers' personal traits, such as honesty and cognitive styles, need to be matched with their tasks to mitigate the agency problem.
- Sensation-seeking managers may take risks for the thrill rather than the expected utility, which can impact their decision-making.
- Managerial experiences, values, and cognitive styles can affect corporate decisions and need to be considered in corporate governance.
Managerial Traits and Corporate Decision-Making
- Behavioral biases of managers, such as overconfidence and sensation seeking, can significantly impact corporate decision-making.
- Overconfident managers tend to overestimate their ability to generate returns in mergers and acquisitions (M&As), leading to overpayment for target companies and value-destroying mergers.
- Malmendier and Tate (2008) use CEO's personal over-investment in the firm and press portrayals as measures of CEO overconfidence.
- Overconfident CEOs are 65% more likely to make an acquisition, particularly if the merger is diversifying and does not require external financing.
- The stock market reaction at merger announcements for overconfident CEOs is significantly more negative than for non-overconfident CEOs.
- Overconfident CEOs use more debt and issue new debt more often, and there is a positive relation between CEOs' personal home leverage and corporate leverage.
- Appointing CEOs and directors with past personal payment default entries increases the likelihood of financial distress of the firm.
- The Hubris Hypothesis of M&As suggests that managers in acquiring firms may pay too much for their targets due to valuation errors.
- Roll's steps in the M&A process include identifying a potential target, undertaking a valuation, and comparing the value to the current market price.
- Managers' personal traits, such as honesty and cognitive styles, need to be matched with their tasks to mitigate the agency problem.
- Sensation-seeking managers may take risks for the thrill rather than the expected utility, which can impact their decision-making.
- Managerial experiences, values, and cognitive styles can affect corporate decisions and need to be considered in corporate governance.
Test your knowledge of managerial traits and their impact on corporate decision-making with this quiz. Explore the behavioral biases of overconfident and sensation-seeking managers, their influence on mergers and acquisitions, and the potential consequences for corporate governance and financial distress.
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