Shareholders sometimes pursue selfish strategies when financial distress is present.These actions generally result in:
A)no action by debtholders since these are shareholder concerns.
B)agency costs to bondholders.
C)investments with risks similar to those of the current firm.
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 can lead to agency costs for bondholders, as the interest of shareholders may not align with that of the debtholders. This can result in an increase in the probability of default or bankruptcy, ultimately leading to a decline in the value of the firm's assets, which will negatively affect the bondholders. Hence, option B is the best choice. Options A, C, D, and E are incorrect based on the given scenario.

Shareholders Sometimes Pursue Selfish Strategies When Financial Distress Is Present