Why does the threat of a takeover motivate managers to act in the interest of stockholders?

• A. Because takeovers eliminate competition in the market.
• B. Because managers risk losing their jobs if the firm is taken over due to poor performance.
• C. Because takeovers guarantee higher salaries for existing managers.
• D. Because managers receive more voting rights after a takeover.

Answer: (B)

Verified step by step guidance

1. Understand the principal-agent problem in corporations, where managers (agents) may not always act in the best interest of stockholders (principals).
2. Recognize that a takeover threat acts as a disciplinary mechanism because if managers perform poorly, the firm's stock price may decline, making it a target for acquisition.
3. Know that during a takeover, current managers often risk losing their positions if the acquiring firm replaces them, creating an incentive to improve performance.
4. Realize that this threat aligns managers' interests with those of stockholders, motivating managers to increase firm value to avoid being replaced.
5. Conclude that the correct reason the threat of a takeover motivates managers is because they risk losing their jobs if the firm is taken over due to poor performance.