Question

Gamma Corp. recently bought stocks in an underperforming company that has failed to maximize stockholder wealth. Gamma Corp. made changes to the top management structure of the company and persuaded the management to pursue strategies that maximize the wealth of stockholders. Gamma Corp. has been able to earn millions by doing so. Which of the following concepts is illustrated in this scenario?

A) GreenmailB) Agency theoryC) Information asymmetryD) Self-dealingE) On-the-job consumption

Answer 1

Answer: A.) Greenmail.

Explanation: In the context above, Gamma Corp is acting as a greenmailer who buys substantial or sizeable share of a company's stock which is capable of instigating a hostile take over bid of the underperforming company. In other to thwart the takeove by Gamma Corp who is the greenmailer in this context, the underperformung company wl have to splash out a premium in other to repurchase the stocks ought by Gamma Corp, thereby making substantial earning fro.the deal.