Moral Hazard
Give an example of excessive risk-taking.
The 2008 financial crisis, where banks took on unsustainable mortgage-backed securities.
What is a golden parachute?
A financial package given to executives if they are dismissed, often after poor performance.
What is a perquisite?
Non-salary benefits granted to executives, like company cars or private jets.
What is Sarbanes-Oxley?
A U.S. law designed to protect investors by improving the accuracy and reliability of corporate disclosures.
Give an example of an excessive CEO perk. (Not private jets)
Luxury vacation homes paid for by the company.
Why do CEOs manipulate earnings?
To meet performance targets and maximize their bonuses or stock options.
Why do boards sometimes fail to control CEOs?
Boards may lack independence or be influenced by the CEO’s power and status.
How does CEO jet use impact stock prices?
Stock prices tend to drop upon disclosure of CEO personal jet use due to perceived inefficiency and misuse of company resources.
How does SOX prevent fraud?
By requiring companies to establish stronger internal controls, disclose more information, and ensure CEO accountability.
Name a company that collapsed due to moral hazard. (Not Enron)
Lehman Brothers.
How does weak oversight lead to moral hazard?
It allows managers to take actions that benefit themselves at the expense of shareholders.
What CG reforms were introduced after Enron?
The Sarbanes-Oxley Act (SOX) was introduced to enhance corporate accountability.
What did Yermack (2006) find about CEO perks?
Personal use of company aircraft by CEOs is linked to lower company performance and stock underperformance.
Why does transparency matter?
Transparency builds trust with shareholders and reduces the risk of corporate misconduct.
Why do CEOs demand perks?
Perks can be seen as compensation and a way to reward themselves for their role in the company.