What does "risk shifting" imply?
A)When faced with bankruptcy, managers tend to invest in high-risk, high-return projects.
B)When faced with bankruptcy, managers do not invest more equity capital.
C)When faced with bankruptcy, managers may make accounting changes to conceal the true extent of the problem.
D)When faced with bankruptcy, managers invest in low risk projects to conserve capital.

Question

Quizplus · Accepted Answer

Risk shifting refers to the tendency of managers to pursue riskier projects when the firm is close to bankruptcy, aiming for high returns to avoid the firm's failure. This behavior is driven by the incentive to recover from financial distress, even if it means taking on projects that might not be in the best interest of creditors or shareholders under normal circumstances.

What Does "Risk Shifting" Imply