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 theory of corporate governance focuses on the principal-agent conflict, where managers may prioritize their own interests over those of shareholders, thereby necessitating monitoring, incentives, and control mechanism ?
Which of the following reflect Jensen’s “Science” of takeovers ?
A. Improve shareholder wealth
B. Reallocate resources productively
C. Impose financial discipline through debt
D. Operate as hostile disruptions
E. Function as an essential corrective force in capitalism
Choose the correct answer from the options given below :
Match List - I with List - II.
List - I
(Term)List - II
(Description)A. Folklore view I. Portrayed as destructive to employees and communities B. Scientific evidence II. Generates significant economic gains by reallocating resources C. Inefficient management III. Fails to maximize shareholder value D. Debt financing IV. Imposes financial discipline by reducing wasteful spending Choose the correct answer from the options given below :
Jensen emphasizes that while popular belief portrays takeovers as destructive, empirical evidence shows they :
According to the paragraph, takeovers are not merely hostile disruptions but serve as :
Whistle blowing is:
John Challenger suggested that we should consider certain things in acting more ethically in downsizing. What things he sugegsted?
A. Planning
B. Pessimism about the future of the company
C. Emotions
D. Timing
E. Stakeholder perception
Choose the correct answer from the options given below:
Utilitarianism theory of ethics refers to which one of the following ?
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 :
Match the items of List (I) with those of List (II); and choose the correct combination :
List - I List - II (a) Ethics are the principles of conduct governing an individual or profession. (i) John Donaldson (b) Ethics is the discipline dealing with what is good and bad, or right and wrong, or with moral duty and obligation. (ii) Keith Davis (c) Ethics are a set of rules that defines right and wrong conduct. (iii) Shea (d) Business ethics, in short can be described as the systematic study of moral (ethical) matters pertaining to business, industry or related activities, institutions, or practices and beliefs. (iv) R. Wayne Mondy Code :
Important Questions from Corporate governance and business ethics
Corporations are controlled and directed by which one of the following?
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 among the following is not a correct statement with regard to Corporate Governance in India ?
List out from the given statements the important ethical principles that a business should follow:
a) To take the necessary action for the development of the concerned industry or business.
b) Pay taxes and discharge other obligations promptly.
c) To ensure the best utilisation of the human resources.
d) Refrain from secret kickbacks or pay-offs to customers, suppliers, administrators, etc.
e) Ensure payment of fair wages and fair treatment of employees.
Choose the correct answer from the options given below:
