Question

How does a toehold help overcome the free rider​ problem? ​(Select the best choice​ below.) A. Free riders usually acquire a toehold in order to give an incentive for an acquirer to take over the remainder of the company and provide​ value-added improvements. B. Since the free riders gain the full amount of the value improvement on the shares acquired as a​ toehold, the free riders are likely to sell their shares to the​ acquirer, allowing the takeover to go forward. C. Since the acquirer gains the full amount of the value improvement on the shares acquired as a​ toehold, a toehold provides an incentive to undertake the​ acquisition, even if the acquirer must pay a price equal to the​ with-improvement value for the rest of the shares. D. Once the acquirer has a​ toehold, free riders no longer can make as much money as they would

Answer 1

Answer: Since the acquirer gains the full amount of the value improvement on the shares acquired as a​ toehold, a toehold provides an incentive to undertake the​ acquisition, even if the acquirer must pay a price equal to the​ with-improvement value for the rest of the shares (C)

Explanation:

When an offer for a firm is made by a bidder, the target shareholders will benefit by keeping their shares and allowing other shareholders to sell their shares at a low price.

However, because every shareholders have the incentive of keeping their shares, none of the shareholders will sell. This situation is referred to as the free rider problem. In order o overcome the free rider problem, the bidders can attempt a buyout, acquire a toehold in the target, or in cases wheeby the acquirer is a corporation, they offer a freezeout merger.