Which of these is a situation that arises when a firm's equity is close to worthless, and equity holders will prefer to not invest in safe projects?

Question

Quizplus · Accepted Answer

This is known as the underinvestment problem or risk-shifting problem. It occurs when equity holders, recognizing that their investment is close to worthless, prefer not to invest in safe projects that could benefit the firm's debt holders more than themselves. Instead, they might favor riskier projects that offer a higher potential return, despite the higher risk of failure, because they have little to lose and potentially more to gain relative to investing in safer projects.

Which of These Is a Situation That Arises When a Firm's