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Capstone > Exam 2 > Flashcards

Exam 2 Flashcards

1
Q

Moral hazard

A

describes a situation in which information asymmetry increases the incentive of one party to take undue risks or shirk other responsibilities because the costs accrue to the other party

after a contract

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2
Q

Adverse selection

A

A situation that occurs when information asymmetry increases the likelihood of selecting inferior alternatives

before a contract

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3
Q

Poison pills

A

Defensive provisions to deter hostile takeovers by making the target firm less attractive.

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4
Q

Information asymmetry

A

situations in which one party is more informed than another, because of the possession of private information

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5
Q

Leveraged buyouts

A

A single investor or group of investors buys, with the help of borrowed money (leveraged against the company’s assets), the outstanding shares of a publicly traded company in order to take it private

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6
Q

Stock options

A

An incentive mechanism to align the interests
of shareholders and managers, by giving the recipient the right (but not the obligation) to buy a company’s stock at a predetermined price sometime in the future

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7
Q

Shareholder capitalism

A

Shareholders—the providers of the necessary risk capital and the legal owners of public companies—have the most legitimate claim on profits

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8
Q

Restructuring

A

Restructuring is a strategy where a firm changes its set of businesses or financial structure

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9
Q

Downscoping

A

Eliminating non-core business units

- This is also called refocusing

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10
Q

Downsizing

A

Getting smaller/leaner and cutting costs through Reduction of employees and Reducing assets

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11
Q

Joint Venture

A

a type of strategic alliance that involves the establishment of an independent corporate entity that is jointly owned and controlled by the two partners (creates a third party

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12
Q

Strategic Alliance

A

a formal agreement between two or more companies to work cooperatively toward some common objective

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13
Q

Blue Ocean

A

Involves a firm seeking sizable and durable competitive advantage by abandoning its existing markets and, then, inventing a new industry or distinctive market segment in which that firm has exclusive access to new demand.

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14
Q

Retrenchment

A

Cost and Asset Reduction to Reverse Declining Sales and Profits

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15
Q

Divestiture

A

Selling a Division or Part of an Organization

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16
Q

Liquidation

A

The company’s operations are brought to an end, and its assets are divvied up among creditors and shareholders, according to the priority of their claims

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17
Q

Turnaround steps

A

Restoring profitability to a distressed company

Step 1: stop the losses

  • Retrenchment/ Cost Cutting
  • Divestitures
  • Replacing the CEO and/or top managers

Step 2: Stabilize and restore profitability

  • Innovation and R&D
  • Image Enhancements
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18
Q

Mergers

A

A combination or consolidation of two firms to form a new legal entity, usually a newly created firm with a new name.

  • Two similar sized firms unite
  • Usually friendly and mutually beneficial
  • Usually merge names
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19
Q

Acquisitions

A

One firm buying another firm either through stock purchases, cash, or the issuance of debt.
A larger firm buys a smaller firm
-The smaller firm usually becomes a subsidiary
-The larger firm usually acquires all of the target firm’s stock
-Can be friendly or hostile

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20
Q

Why M&A

A
  • reduction of competitive intensity
  • lower costs
  • increased differentiation
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21
Q

Logic of M&A

A

Value creation from division synergies
-Dominant logics build from each other.

Economies of scale
-Increase volume of production, decreases costs

Economics of scope
-Creating two or more products simultaneously so the cost is lower than producing the products separately.

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22
Q

Limitations of M&A

A

High premiums
- lots of costs associated with acquiring a firm

cultural differences
- different dominant logics

knowledge spillovers
- competing firms can imitate advantages

managerial motives
-self interest rather than enhancing the firms value

23
Q

5 good reasons for diversifying

A
  • Enter new markets with greater growth potential than that which current markets offer
  • Enter markets with different product life-cycle considerations
  • Reduce the risks of remaining in only one market (or very few)
  • Dominant Logic
24
Q

Related diversification

A

based on Corporate Portfolio Theory

25
Q

Unrelated diversification

A

based on Investment Portfolio Theory

26
Q

What theories or ideas are related diversification based on

A

Portfolio Theory

27
Q

Why might increased diversification impede performance (inverted U)

A

Diminishing Returns:

  1. Dilution of Dominant Logic
    - the “big picture” could become blurred
  2. Control costs
    - Information technology/ administrative costs to track and manage multiple businesses/ regions
28
Q

Strategic Fit

A

Exists whenever one or more activities in the value chains of different businesses are sufficiently similar to present opportunities for:

Transferring competitively valuable expertise or technological know-how
from one business to another

Combining performance of common value chain activities to achieve lower costs

Exploiting use of a well-known brand name

29
Q

Control costs

A

Information technology/ administrative costs to track and manage multiple businesses/ regions

30
Q

Dominant logic

A

a common way of thinking about strategy across different businesses in a diversified firm, and making them ‘work’

Dominant logic is a common way of applying/using strategy across different geographic segments in a globally diversified firm.

  • It is an interpretation of how a company has succeeded in one country….
  • and applies that dominant logic to succeed other global apply to all markets
31
Q

How can dominant logic work or not work

A

sometimes what works well in one culture will not work well in another culture.

32
Q

How do you repair an over-diversified firm

A

Refocusing
-Contraction through business segment divestiture
-Eliminate business segments that
Are Losing Money
Dilute Dominant Logic
Just Don’t ‘Fit’
-Stick to What You Know Best (a mantra in strategic management)

33
Q

S-curve theory of diversification (3 stages)

A

Limited
Intermediate
Extensive

34
Q

S-curve theory of diversification low (limited) Internationalization

A

U-Shape relationship

Negative returns before positive returns

  • Often due to Liability of Foreignness
  • Takes time to learn new markets, adapt
35
Q

S-curve theory of diversification Intermediate to High Internationalization

A

Inverted-U relationship

Implies a positive relationship between global diversification, and performance as risk is diversified. But possibly…
-Performance begins to suffer when you become “too” global
-Sometimes, firms chase “bad” markets with profits from “good” ones. Why?
Hubris
Dilution of Dominant Logic

36
Q

liability of foreignness

A

“Additional costs a firm operating in a market overseas incurs that a local firm would not incur”

  • The “rules of the game” in different countries can be different
  • Foreign firms are often discriminated against, sometimes formally and other times informally
37
Q

Hubris

A

overconfidence in their capabilities ( or that of the firm) that can lead to flawed decisions

38
Q

CEO duality

A

the CEO is also the chairman of the board

39
Q

What does CEO duality mean in terms of governance

A

governance - Advise, review, and approve management strategic plans, decisions, and actions in managing the company

40
Q

Board insiders

A

Director who is an executive employed by the corporation

41
Q

Board outsiders

A

Director who is not an executive employed by the corporation

42
Q

What might make a board outsider tainted

A

if they are affiliated with the company in any way. If they have family or friends in the company or top management. If they are retired from the company.

43
Q

Corporate governance refers to the relationships among which three groups

A
  • shareholders
  • board of directors
  • top management
44
Q

Corporate governance hierarchy (3 groups)

A

shareholders oversee board of directors who oversees top management

45
Q

In a typical firm agency relationship, which parties can be principals and agents

A

board of directors

46
Q

In a typical firm agency relationship, which party can only be the principal

A

shareholders

47
Q

In a typical firm agency relationship, which party can only be the agent

A

top manager

48
Q

Corporate governance

A

Refers to the relationship among the shareholders, board of directors, and
top management in determining the direction and performance of the corporation.

49
Q

Regarding the Board of Directors, what are the recommendations for good governance with respect to Board Activism

A
  • Meet regularly without management present

- Audit committees should meet at least 4 times a year

50
Q

Regarding the Board of Directors, what are the recommendations for good governance with respect to Director Quality

A
  • Need at least one independent member with experience in the firm’s core business
  • Outsider Directors should not sit on more than 4 boards
51
Q

Regarding the Board of Directors, what are the recommendations for good governance with respect to Independence

A
  • No more than two insiders

- Audit, compensation, and nominating committees should be outsiders only (i.e., “true” outsiders)

52
Q

Regarding the Board of Directors, what are the recommendations for good governance with respect to Equity Ownership

A
  • Each director should have at least $150,000* equity in the company
  • Should be paid only in equity
53
Q

Regarding the Board of Directors, what are the recommendations for good governance with respect to Board Size

A
  • Smaller boards
    And fewer insiders…

One CEO and one Chairperson

Capstone (2 decks)

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