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

When shareholders pursue selfish strategies, such as taking large risks or paying excessive dividends, this can lead to positive agency costs, as bondholders may impose various restrictions and covenants to protect their investment. These restrictions can limit the firm's ability to make investments and reduce its overall value. Therefore, choice B is the best answer.

When Shareholders Pursue Selfish Strategies Such as Taking Large Risks