|FIN 610||Prof. Ed Nelling|
QUIZ 1 – SPRING 2018-2019
· This quiz must be submitted by the date and time indicated online. First, save this document to your computer. You must type your answers; I will not grade handwritten responses. When you are finished with the quiz, upload it to the assignment tab. Note that after uploading your quiz, you will not be able to change anything, so don’t upload it until you are comfortable with your answers.
· Name your file using the format Quiz 1 lastname (e.g., Quiz 1 Nelling).
· The quiz is “open book and notes,” and you are allowed to refer to any of the course videos or other material in the course shell. You are not allowed to use any information on the web other than what is available in the FIN 610 course shell. Using other information constitutes plagiarism, and will result in a grade of zero on the quiz.
· The quiz consists of two questions. To get full credit for a correct answer, you must (i) write clearly and (ii) cite evidence from the text and/or assigned readings. (Not citing the readings is one of the main reasons that students lose points on the quiz.) Do not cite evidence from the cases or other sources.
· You may be wondering about how long your answers need to be to get full credit. There is no simple answer to this question. I do not expect you to write (nor do I want to read) a dissertation for a ten-point quiz question. As a very rough guideline, I would expect most answers to a ten-point question to range from 150 to 400 words.
· You must do your own work. You can consult with your instructor for brief clarifications of issues regarding the questions. You cannot consult with any of your classmates, co-workers, friends, etc. In addition, you should not discuss the quiz with anyone until after the solution and grades have been posted. Read the following statement and type your name in acknowledgement:
“I will neither give nor receive unauthorized help on this quiz.”
Type your name: ___________________________________ Score: ____ / 20
Question 1 (10 points) _____
Much of our discussion this term focused on CEO compensation.
(a) Briefly describe the “ratchet effect” associated with the use of peer groups in setting compensation levels. Why is it a problem? (5 points)
(b) Some people suggest that using stock options as compensation tends to encourage risk-taking behavior on the part of executives. Why might this be the case? (5 points)
Question 2 (10 points) _____
(a) Describe what is meant by the phrase “earnings management” and briefly describe how it is measured. (5 points)
(b) Is the tendency to engage in earnings management affected by corporate governance? If so, how? (5 points)