The decline in the use of equity finance and the increase in corporate borrowings during the 1980s might be explained as an attempt by firms to
A)avoid the strict regulations surrounding new issues of common stock.
B)avoid adverse selection problems.
C)disguise questionable expenditures from shareholders.
D)mitigate principal-agent problems.

Question

Quizplus · Accepted Answer

The increase in corporate borrowings and decline in equity finance suggests that firms were trying to mitigate principal-agent problems. This is because issuing equity means giving up ownership and control of the company to shareholders, while borrowing allows firms to maintain control and make decisions without having to consult with or be accountable to shareholders. By relying more on debt financing, firms could avoid some of the difficulties associated with managing the conflicting interests of shareholders and management.

The Decline in the Use of Equity Finance and the Increase