Some people--including the current chairman of the Federal Reserve Board of Governors--have argued that one advantage of corporate debt from the stockholders' standpoint is that the existence of debt forces managers to focus on cash flow and to refrain from spending too much of the firm's money on private plane and other "perks." This is one of the factors that led to the rise of LBOs and private equity firms.

Question

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The argument presented suggests that the existence of corporate debt can help align the interests of managers with those of stockholders by forcing managers to focus on generating cash flow and avoiding excessive spending on luxurious perks. This rationale has been used to support the use of leveraged buyouts (LBOs) and private equity firms, which rely heavily on debt financing to acquire companies and then seek to restructure or streamline their operations to boost profitability. However, this view is not universally accepted, and there are also concerns that excessive debt can increase financial risk and create conflicts of interest between shareholders and bondholders.

Some People--Including the Current Chairman of the Federal Reserve Board