A type of agency problem that results in shareholders gaining by choosing not to finance new,positive-NPV projects is:

Question

Quizplus · Accepted Answer

Debt overhang is an agency problem where shareholders choose not to finance new, positive-NPV (Net Present Value) projects due to the fear that the increased debt will reduce their share value. This is because the expected future cash flows from such projects will go first towards servicing the debt, leaving fewer funds for shareholders. Therefore, shareholders may opt to forego profitable investment opportunities and focus on paying off existing debts to avoid the negative impact on share prices.

A Type of Agency Problem That Results in Shareholders Gaining