Question

Which of the following statements is FALSE? Select one:

a. Owning stock in the company and having a compensation package that is sensitive to the performance can better align the interest of managers with the benefit of the shareholders.

b. The model proposed by Tirole (2006) illustrates that less project will be financed by outside investors when there are corporate governance mechanisms in place to monitor the managers. Because outside investors will have to cover the expense of monitoring that is quite high.

c. The corporate governance system attempts to align interests by providing incentives for taking the right action and punishments for taking the wrong action.

d. The role of the corporate governance system is to mitigate the conflict of interest that results from the separation of ownership and control without unduly burdening managers with the risk of the firm.

Answer 1

The false statement is :

b. The model proposed by Tirole (2006) illustrates that less project will be financed by outside investors when there are corporate governance mechanisms in place to monitor the managers. Because outside investors will have to cover the expense of monitoring that is quite high.

This is because, the outside investors are more interested to invest in a company in which there is corporate governance present. Even though the investors will have to bear the high cost of monitoring the management, but the reward from this monitoring outweights the cost incurred.

The corporate governance system help to mitigate the conflict of interest that results from the separation of ownership and control and thereby work in the best interest of the organization.

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