Which of the following theories provides a reason that issuing debt may be favored over issuing equity?
A)inside information
B)agency considerations
C)issuing costs
D)all of the above

Question

Quizplus · Accepted Answer

All three theories provide reasons why a company may favor debt over equity.

- Inside information: if management believes that their company is undervalued by the public market, they may prefer to issue debt rather than equity in order to avoid diluting their ownership stake. 
- Agency considerations: debt can provide a greater degree of control over a company's capital structure, as debt holders typically do not have voting rights and therefore cannot influence management decisions. Equity holders, on the other hand, can vote on important matters, potentially leading to conflicts of interest between management and shareholders. 
- Issuing costs: issuing equity can be more expensive than issuing debt, as the underwriting fees and expenses related to an equity issuance can be substantial. All of the above theories provide a reason that issuing debt may be favored over issuing equity.

- Inside information: If managers have inside information that indicates the company is undervalued, they may prefer to issue debt rather than equity to avoid diluting the value of existing shares.
- Agency considerations: Issuing debt creates a contractual obligation to repay the lender, which can reduce agency costs by aligning the interests of managers and creditors. On the other hand, issuing equity can create agency problems if managers prioritize their own interests over the interests of shareholders.
- Issuing costs: Issuing debt typically involves lower transaction costs than issuing equity, since debt does not require extensive disclosures or shareholder approval. This can make debt a more attractive option for smaller companies or those with limited resources.

Which of the Following Theories Provides a Reason That Issuing