When shareholders pursue strategies such as taking excessive risks or paying excessive dividends, these will result in:
I.no action by debtholders since these are equityholder concerns;
II.positive agency costs, as bondholders act on various restrictions and covenants, which will diminish firm value;
III.investments of the same risk class that the firm is in
A)I only
B)II only
C)III only
D)I and III only

Question

Quizplus · Accepted Answer

Excessive risks and dividends will result in positive agency costs, as bondholders will act on restrictions and covenants to protect their investment. This will lead to a decrease in firm value. Option I is not correct as it assumes no action from debtholders, which is incorrect. Option III is irrelevant to the question.

When Shareholders Pursue Strategies Such as Taking Excessive Risks or Paying