When shareholders pursue selﬁsh strategies such as taking large risks or paying excessive dividends, these will result in:
A)no action by debtholders since these are equity holder concerns.
B)positive agency costs, as bondholders impose various restrictions and covenants which will
Diminish ﬁrm value.
C)investments of the same risk class that the ﬁrm is in.
D)undertaking scale enhancing projects.
E)lower agency costs, as shareholders have more control over the ﬁrm's assets.

Question

Quizplus · Accepted Answer

Shareholders pursuing selfish strategies such as taking large risks or paying excessive dividends may increase the riskiness of the firm, reducing its value and hurting the interests of bondholders. As a result, bondholders may impose various restrictions and covenants, such as limits on debt ratios or requiring collateral, to protect their interests and minimize the negative impact of shareholder actions on firm value. These restrictions may increase agency costs, as the firm may face additional costs to comply with these covenants and constraints. Therefore, the best choice is B.

When Shareholders Pursue Selﬁsh Strategies Such as Taking Large Risks