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Running head: WEEK 3-CHAPTER 4 1

International Finance MG760-144


Week3 Chapter 4

Nazifa Antara Prome


Homework Assignment

Monroe College King Graduate School


WEEK 3- CHAPTER 4 2

International Finance MG760-144


Week 3 Chapter 4
Homework Assignment

Please answer the question below:

1. Following corporate scandals and failures in the U.S. and abroad, there is a growing
demand for corporate governance reform. What should be the key objectives of
corporate governance reform? What kind of obstacles can there be thwarting reform
efforts?
Answer:

There has been increase in the scandal in an organizations and in many parts of counties. The key
objectives of corporate governance reform should create ethical rules and regulation to follow.
The government should strengthen the shareholder rights. Shareholder should have the rights to
choose the board of directors. Government should make rules to protect the shareholder funds in
an organization. Controlling shareholders and managers do not willing to destruct their control
rights and thus struggle reform efforts.
WEEK 3- CHAPTER 4 3

2. Studies show that the legal protection of shareholder rights varies a great deal across
countries. Discuss the possible reasons why the English common law tradition
provides the strongest and the French civil law tradition the weakest protection of
investors.

Answer:

The common law system had been adopted to prevent seizure of land by the sovereign. Common
law has been adopted to protect the property of the people and to resolve the specific disputes.
The common law had been spread to British colonies such as India, US, Canada, Australia and
other countries. French civil law system was created by Napoleon because he did not want
judges to have the discretion to resolve feudal privileges after the French revolution. It has been
less protective of property rights of investors. From last three decades, the law is improving the
shareholder protection rights.

3. Explain the wedge between the control and cash flow rights and discuss its implications
for corporate governance.
Answer:

A security price pattern where lines drawn trend and below a price chart converge into an
arrow shape. Wedge shaped patterns are thought by technical analysts to be useful in
analyzing a short to intermediate term reversal of what the analyst feels to be the major
price trend. When there is a separation of ownership and control, managers have control
rights with insignificant cash flow rights, whereas shareholder have cash flow rights but no
control rights. The wedge can increase the disputes between the shareholders and
managers. The wedge is the source of agency problem.
WEEK 3- CHAPTER 4 4

4. Discuss different ways that dominant investors use to establish and maintain the control
of the company with relatively small investments.
Answer:

Dominant Investors may use

Shares with superior voting rights.

Pyramidal ownership structure.

Inter-firm cross-holdings.

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