CFA Level I · CFA Level I Exam · Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits
Which of the following is the most likely consequence for a company whose weak governance leads to repeated related-party dealings and poor transparency?
The most likely consequence is a higher risk of legal, reputational, and regulatory penalties. Weak transparency and repeated related-party dealings invite scrutiny, sanctions and loss of investor trust, and usually raise the firm's financing costs rather than lower them.
- AA lower cost of debt due to higher perceived disclosure
- BA higher risk of legal, reputational, and regulatory penaltiesCorrect
- CA stronger bargaining position with suppliers
Explanation
Poor transparency and abusive related-party dealings raise the chance of fraud findings, lawsuits, regulatory sanctions and reputational damage, and typically raise financing costs rather than lower them.
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