Empirical Studies Have Found That, Across Firms, Tobin's Q Ratio

question 8

Multiple Choice

Empirical studies have found that, across firms, Tobin's Q ratio initially increases with managerial ownership fraction, but beyond a critical level, the ratio decreases with further increases in managerial ownership.One argument for why this ratio decreases at higher managerial ownership levels is that:

• A)board directors no longer believe that they need to monitor management's incentives.
• B)fewer passive shareholders own the firm's stock.
• C)outside blockholders tend to be attracted to firms with high managerial ownership, and outside blockholder ownership generally destroys firm value.
• D)management can use their shares to leverage their entrenched position.

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Definitions:

Transfer Prices

Prices at which divisions of the same company transact with each other, often set to allocate revenues and expenses among various subunits of the company.

Variable Cost

Expenses that change in proportion to the business activity or production volume.

Profit Margin

A financial ratio indicating the percentage of revenue that exceeds the costs associated with making or buying the goods sold.

DuPont Formula

A formula used to provide a detailed analysis of Return on Equity (ROE) by breaking it down into three major components: operating efficiency, asset use efficiency, and financial leverage.