Some people--including the current chairman of the Federal Reserve Board of Governors (Ben Bernanke)--have argued that one advantage of corporate debt from the stockholders' standpoint is that the existence of debt forces managers to focus on cash flow and to refrain from spending too much of the firm's money on private plane and other "perks." This is one of the factors that led to the rise of LBOs and private equity firms.

Question

Quizplus · Accepted Answer

The statement is true and supported by the argument that the existence of corporate debt forces managers to focus on cash flow and avoid excessive spending on luxurious items, which is a factor that contributed to the rise of LBOs and private equity firms.

Some People--Including the Current Chairman of the Federal Reserve Board