The presence of a large amount of debt can encourage shareholders to take excessive risk becaus?

Question

Quizplus · Accepted Answer

When a firm has a large amount of debt, the costs of failure are typically borne by the debt holders. This creates an incentive for equity holders to take excessive risk because they have relatively little to lose if the company fails. In contrast, debt holders are more likely to prefer a conservative approach to risk management in order to protect their investment. Therefore, option D is the best choice.

The Presence of a Large Amount of Debt Can Encourage