If All of the Divisions in a Vertically Integrated Firm

question 32

Multiple Choice

If all of the divisions in a vertically integrated firm are owned by the same company, why is it possible that asymmetric information problems can lead to inefficient outcomes in vertically integrated firms?

• A) Divisions that produce parts for other divisions have effective monopoly power, so the outcome for these division must be inefficient.
• B) This outcome is no longer possible in the U.S. after passage of the Sarbanes-Oxley law.
• C) Vertically integrated firms are often subject to antitrust investigations, so managers routinely limit the amount of information that flows between divisions.
• D) Managers in some divisions may not have information about production capacities or costs in related divisions.

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Definitions:

Factor Analytic Technique

A statistical method used to describe variability among observed, correlated variables in terms of potentially lower number of unobserved variables, called factors.

Test Construction

The process of developing a test that accurately measures what it is intended to measure, with reliability and validity.

Factor Analytic Approach

A statistical method used in psychology to identify clusters of related items (factors) on tests or surveys, revealing underlying variables.

Correlations

Statistical measures that describe the extent to which two variables change together, but not necessarily indicating causation.