1. Some U.S. companies have 1-year terms for directors. The entire corporate board must run for election at each annual meeting. Other companies have 3-year terms; only a third of directors face votes at each meeting. A 2004 study found that the companies with 3- year terms have lower stock prices, controlling for other factors. What might explain this finding? Explain.
2. Two firms have potential investment projects. Each project costs $100 to undertake. One firm’s project is safe. In a year, it produces $125 in revenue for sure. The risky firm’s project earns $150 with probability ¾, and zero with probability ¼. With asymmetric information, savers don’t know which one is risky and which is safe. Savers will buy bonds for $100 if expected payment is at least $110. Will the safe firm be able to sell a bond? Will the risky firm be able to sell a bond? Show your reasoning.