The free-rider problem, when referring to monitoring of the firms' performance, often results in
A)ineffective monitoring by the shareholders.
B)monitoring being delegated by shareholders to boards of directors.
C)no monitoring by a large number of small individual investors.
D)ineffective monitoring by the shareholders, monitoring being delegated by shareholders to boards of directors, and no monitoring by a large number of small individual investors.

Question

Quizplus · Accepted Answer

The free-rider problem occurs when some shareholders choose not to monitor the firm's performance, relying on other shareholders to do the monitoring. This often leads to ineffective monitoring by shareholders, who may delegate their monitoring responsibility to boards of directors. Additionally, small individual investors may not have the resources or incentives to monitor the firm's performance, leading to a lack of monitoring from this group as well. Therefore, the best answer is D, which includes all of these outcomes.

The Free-Rider Problem, When Referring to Monitoring of the Firms