Consider a case in which existing shareholders do not have to invest time and effort, but still participate in the gains from a takeover, while the bidder who puts in the time and effort is forced to give up substantial profits. This situation is called
A)a leveraged buyout.
B)a golden parachute.
C)the free rider problem.
D)a toehold.

Question

Quizplus · Accepted Answer

The situation described is an example of the free rider problem, in which some shareholders benefit from the efforts of others without contributing themselves. A leveraged buyout refers to a situation in which a company is purchased primarily with borrowed funds. A golden parachute is a type of compensation given to executives if they are terminated due to a change in control of the company. A toehold is an initial investment made by a buyer to gain a foothold in a target company.

Consider a Case in Which Existing Shareholders Do Not Have