Ethics And The Conduct Of Business 7th Edition Boatright – Test Bank

Chapter 11
Ethics in Finance
CHAPTER SUMMARY
Ethical issues in finance are important because they bear on our financial well-being. Ethical
misconduct, whether it be by individuals acting alone or by financial institutions, has the
potential to rob people of their life savings. Because so much money is involved in financial
dealings, there must be well-developed and effective safeguards in place to ensure personal
and organizational ethics. Although the law governs much financial activity, strong emphasis
must be placed on the integrity of finance professionals and on ethical leadership in our
financial institutions. Some of the principles in finance ethics are common to other aspects
of business, especially the duties of fiduciaries and fairness in sales practices and securities
markets. However, such activities as insider trading and hostile takeovers raise unique
issues that require special consideration.
CHAPTER OBJECTIVES
• Describe the financial services industry and the specific ethical issues that arise in
that field.
• Describe the ethical responsibilities of the various players in the financial markets.
• Explain why insider trading is unethical.
• Explain the nature of hostile takeovers and why they are an exception to the usual
course of business.
SUGGESTED DISCUSSION PROMPTS
1. How does the field of finance provide intrinsic motivation for deception?
2. Is it unethical for a financial broker to generate commissions in a way that neither
helps nor harms their client?
3. How does one tell when legitimate transactions become a case of “churning”?
4. What does it mean for financial markets to be “fair”?
5. What ethical rules does insider trading involve breaking?

ASSESSMENT FOR IN-CLASS USE
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Multiple Choice Questions
Choose the BEST possible answer for each of the following.
1. Financial dealings most fundamentally require the value of .
A. freedom
B. time
C. trust
D. competence
Answer: C
2. Financial service people are most fundamentally in the business of selling .
A. savings
B. investments
C. stocks
D. bonds
Answer: B
3. Deception is an ever-present danger in financial selling mostly because .
A. the customer has to rely on the seller for all of the relevant information
B. financial salespeople often do not know very much about the securities they
sell
C. there are not many laws that regulate financial services
D. no one ever has all the information at a given time
Answer: A
4. A financial broker may be tempted to “churn” because by doing so they can
.
A. sell more shares
B. artificially inflate yields
C. get more customers
D. earn additional commissions
Answer: D

5. Due to the wide variety of financial products available, it is incumbent on the broker
to help the customer select those that are .
A. suitable
B. liquid
C. cheapest
D. least risky
Answer: A
6. Doing business in the financial markets most fundamentally presupposes that
will be respected.
A. power
B. fairness
C. freedom
D. ideas
Answer: B
7. Efficiency in financial markets means that .
A. social well-being will be maximized
B. all investments will keep their value
C. overall yields will increase
D. fairness will always be maintained
Answer: C
8. If people in financial markets have unequal access to information, .
A. it is always unfair
B. this can happen in spite of their expertise
C. it should not impact their ability to make good decisions
D. a law has probably been broken
Answer: B
9. Agreements reached in financial trading are generally considered fair as long as
.
A. everyone profits from the exchange
B. all traders involved are professionals
C. everyone has the same information
D. they are reached through good-faith bargaining
Answer: D
10. Takeover offers must now be accompanied by enough time so that .
A. a. shareholders have opportunity to consider the offer carefully
B. b. consumers can decide whether to buy stock in the company
C. c. abusive tender offers can be rescinded by government action
D. d. there can be an orderly transition of control
Answer: A
Essay Questions
1. Explain why in the context of finance it is so important that customers be
empowered to make rational choices.