Asked by Silupe Lanier on May 02, 2024
Verified
The bankruptcy risk produces an ambiguous effect on agency costs.
Bankruptcy Risk
Bankruptcy risk refers to the likelihood that a company will be unable to meet its debt obligations and may be forced into bankruptcy.
Agency Costs
Expenses arising from the conflict of interest between a company's management or its shareholders and its creditors.
- Comprehend how various financial factors like financial distress, agency costs, and bankruptcy costs influence a company's desired capital structure.
- Acknowledge the underpinnings and boundaries of theoretical constructs like the MM and Miller models, with a specific focus on tax implications and bankruptcy charges.
Verified Answer
OW
Oliver WoottenMay 09, 2024
Final Answer :
True
Explanation :
The bankruptcy risk can both increase and decrease the agency costs. On one hand, it may motivate management to take excessive risk to avoid bankruptcy, which can increase agency costs. On the other hand, it may also induce shareholders to monitor managers more closely to prevent bankruptcy, which can reduce agency costs. Therefore, the effect of bankruptcy risk on agency costs is ambiguous.
Learning Objectives
- Comprehend how various financial factors like financial distress, agency costs, and bankruptcy costs influence a company's desired capital structure.
- Acknowledge the underpinnings and boundaries of theoretical constructs like the MM and Miller models, with a specific focus on tax implications and bankruptcy charges.
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