Agency Conflict
What is the conflict that arises because managers control the firm while shareholders own it?
Agency conflict
What is the market in which firms are bought and sold to transfer control rights?
The market for corporate control
What additional amount above the current share price do shareholders receive in a takeover?
A takeover premium
What is a board structure where directors are elected in staggered terms?
A staggered board
What is paying a hostile bidder to repurchase its shares at a premium called?
Greenmail
What do we call the costs resulting from managers not acting in shareholders’ best interests?
Agency costs
What is a takeover bid that target management resists?
A hostile takeover
Who typically captures most of the gains in a successful takeover?
Target shareholders
What rule requires an unusually high percentage of shareholder votes to approve a merger?
A supermajority rule
What is seeking a friendly alternative acquirer to block a hostile bid called?
Finding a white knight
What governance problem stems from the separation of ownership and control?
The principal–agent problem
What motivates managers to improve performance due to fear of being replaced?
The threat of takeover
What usually happens to top management after a hostile takeover?
They are replaced
What defense allows existing shareholders to buy shares at a discount if a bidder acquires a large stake?
A poison pill
What problem arises when shareholders rely on others to monitor management?
The free-rider problem
What term describes managers extracting personal benefits (e.g., empire building, perks) at the expense of shareholder value?
Private benefits of control
Why do poorly performing firms become attractive takeover targets?
Because their undervaluation creates profit opportunities for acquirers
What does it indicate if a firm’s stock price increases after a takeover announcement?
That the market expects value creation
What ownership structure allows insiders to maintain control through superior voting rights?
Dual-class shares / differential voting rights
What happens to managerial incentives if takeover defenses fully eliminate takeover threats?
Managerial discipline decreases
Why does dispersed ownership increase the severity of agency conflicts in public corporations?
Because no single shareholder has sufficient incentives to monitor management (free-rider problem)
How does the takeover market act as an external corporate governance mechanism?
By reallocating control to more efficient owners and disciplining underperforming management through the threat of replacement
According to corporate finance theory, why can takeover threats reduce managerial slack even if no takeover occurs?
Because managers anticipate the risk of replacement and therefore act to maximize shareholder value ex ante
Why can takeover defenses both protect and harm shareholder value?
Because they may prevent undervalued or coercive bids, but they can also entrench management and weaken the disciplinary role of the takeover market
Under what condition is the market for corporate control most effective as a governance mechanism?
When capital markets are active, ownership is transferable, and takeover defenses do not excessively entrench management.