Read the following passage and answer the questions : Jensen examines the dynamics of corporate takeovers and challenges prevailing misconceptions surrounding them. He argues that takeovers are not merely hostile disruptions but serve as a crucial mechanism of the market for corporate control. According to Jensen, inefficient management teams often fail to maximize shareholder value and takeovers act as disciplinary tool by transferring control to more competent managers. He emphasizes that while popular belief portrays takeovers as destructive to employees and communities, empirical evidence suggests that they frequently generate significant economic gains by reallocating resources to more productive uses. Jensen distinguishes between the folklore-emotional and political arguments against takeovers depicting as harmful to employees and society and the science, which demonstrates thier role in improving efficiency and shareholder wealth. He also addresses concerns about debt financing in leveraged buyouts, contending that high leverage can impose financial discipline on managers by reducing wasteful spending. Ultimately, Jensen frames takeovers as an essential corrective force within capitalism, countering managerial inefficiency and aligning corporate behavior with shareholder interests. His analysis laid the groundwork for modern corporate finance debates on governance, agency costs and the value-creating potential of mergers and acquisitions.
In the paragraph, inefficient management teams are described as those who :
Fail to enhance shareholder value
They fail to enhance shareholder value — option 1.
The sentence. “According to Jensen, inefficient management teams often fail to maximize shareholder value and takeovers act as disciplinary tool by transferring control to more competent managers.” The definition is given directly, and option 1 restates it.
Why the definition is framed that way. Jensen writes within the agency framework. The shareholder is the principal and the manager his agent, and management is judged by a single criterion — whether it maximises the value of the owners’ claim. On that view “inefficiency” is not incompetence in general but a specific failure: value that could have been created has not been.
| Form of the failure | Example |
|---|---|
| Empire-building | Growth pursued for its own sake, through acquisitions that do not pay |
| Free cash flow retained | Cash kept and invested in poor projects rather than returned to shareholders — Jensen’s own free cash flow hypothesis |
| Perquisites and excess overhead | Spending that benefits managers rather than owners |
| Excessive caution | Failure to take profitable risks, since the manager’s job is at stake and the shareholder’s is not |
Why the other options fail. None describes inefficiency in the passage’s sense. Option 3 is the sharpest: maximising community welfare sounds like a virtue and, on a stakeholder view, would be one — but the passage is written from the shareholder-value standpoint, in which pursuing community welfare instead of shareholder value is precisely the deviation complained of. Options 2 and 4 appear nowhere in the passage.
The link to the rest of the argument. The definition matters because it supplies the takeover’s justification: if inefficiency is unrealised shareholder value, then the value gap is measurable in the share price, a bidder can see it, and the takeover mechanism has something to correct. Define inefficiency any other way and the argument does not run.
Hence, the answer is fail to enhance shareholder value.
Similar Questions
Which one of the following is not a principle of corporate Governance ?
Match the items given in the List - I and List - II and suggest the correct code :
List - I List - II (a) Ethics (i) Right code of behaviour for a group or profession (b) Morality (ii) Prescribes right conduct for everyone (c) Moral standard (iii) Needs some inclination to follow morality (d) Meta Moral Standard (iv) Practical and pragmatic Code :
Assertion (A) : When a corporation acts ethically and socially responsible in its business decisions and strategic planning, then the corporation will be more sustainable.
Reason (R) : Socially responsible corporate behaviour is increasingly seen as essential to long-term survival of companies.
Social responsibility of business while appropriating natural resources by a corporate entity has been recommended in which one of the following?
Disclosure of corporate governance practice and its compliance has been stipulated in which one of the following?
Kumar Mangalam Birla Committee Report, Ramesh Chandra Committee Report, Cadbury Committee Report primarily focus on which one of the following?
'The continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large.'
This may be attributed rightly to which one of the following?
Read the following passage and answer the questions :
Jensen examines the dynamics of corporate takeovers and challenges prevailing misconceptions surrounding them. He argues that takeovers are not merely hostile disruptions but serve as a crucial mechanism of the market for corporate control. According to Jensen, inefficient management teams often fail to maximize shareholder value and takeovers act as disciplinary tool by transferring control to more competent managers. He emphasizes that while popular belief portrays takeovers as destructive to employees and communities, empirical evidence suggests that they frequently generate significant economic gains by reallocating resources to more productive uses. Jensen distinguishes between the folklore-emotional and political arguments against takeovers depicting as harmful to employees and society and the science, which demonstrates thier role in improving efficiency and shareholder wealth. He also addresses concerns about debt financing in leveraged buyouts, contending that high leverage can impose financial discipline on managers by reducing wasteful spending. Ultimately, Jensen frames takeovers as an essential corrective force within capitalism, countering managerial inefficiency and aligning corporate behavior with shareholder interests. His analysis laid the groundwork for modern corporate finance debates on governance, agency costs and the value-creating potential of mergers and acquisitions.
Statement (I) : The science of ethics is a normative science.
Statement (II) : Normative sciences judge the value of the facts in terms of an idea; concerned with judgements of ‘what ought to be’ but not with factual judgements.
Code :
Assertion (A) : Decisions in small matters largely tend to set a pattern for the more important ones you may make as managers.
Reasoning (R) : A multi-industry survey conducted in the USA indicated that 40% of the managers said that their superiors had at some time told them to do certain things unethical.
Code :
Important Questions from Corporate governance and business ethics
As per the Anglo-Saxon Model of Corporate Governance, the authority lies with the following. Arrange these in decreasing order of authority.
A. Board of Directors
B. Managers
C. Shareholders
D. Employees (Company)
E. Trade unions
Choose the correct sequence from the options given below
Assertion (A) : Corporate governance is an important instrument of investor protection.
Reason (R) : Strong corporate governance is indispensable to resilient and vibrant capital markets.
Which one of the following options is correct?
Which one of the following is not a norm of corporate governance ?
Which one among the following is not a true statement?
Ethics are moral principles and values which:
