Which of the following is a consequence of high leverage regarding agency costs? A) Managers may prioritize the interests of creditors over shareholders B) Investment decisions may... Which of the following is a consequence of high leverage regarding agency costs? A) Managers may prioritize the interests of creditors over shareholders B) Investment decisions may favor shareholders at the expense of creditors C) Debt financing reduces firm value consistently D) Equity financing is always preferred in times of financial distress
Understand the Problem
The question is asking about the implications of high leverage in the context of agency costs, specifically how it affects the interests of managers, creditors, and shareholders. It presents multiple-choice options, indicating that it is likely part of a larger assessment or quiz.
Answer
Investment decisions may favor shareholders at the expense of creditors.
Investment decisions may favor shareholders at the expense of creditors.
Answer for screen readers
Investment decisions may favor shareholders at the expense of creditors.
More Information
The agency cost of debt arises from the conflict of interest between shareholders and debtholders, where management might make decisions benefiting shareholders but potentially harming creditors.
Tips
A common mistake is to assume that high leverage will always lead to a priority for creditors, but agency costs can favor shareholders over creditors.
Sources
- Agency Cost of Debt: Definition, Minimizing, Vs. Cost of Equity - investopedia.com
AI-generated content may contain errors. Please verify critical information
