Which of the following statements is most correct?
A) One of the ways in which firms can mitigate or reduce agency problems between bondholders and stockholders is by increasing the amount of debt in the capital structure.
B) The threat of takeover is one way in which the agency problem between stockholders and managers can be alleviated.
C) Managerial compensation can be structured to reduce agency problems between stockholders and managers.
D) Statements b and c are correct.
E) All of the statements above are correct.

Question

Quizplus · Accepted Answer

Statement B is correct as the threat of takeover forces managers to act in the interest of shareholders to avoid being taken over. Statement C is correct as managers' compensation can be structured in a way that aligns their interests with those of shareholders. Statement A is incorrect as increasing debt can lead to negative consequences such as financial distress costs and bankruptcy risk, and may not necessarily reduce agency problems. Therefore, the best choice is D as statements B and C are correct.

Which of the Following Statements Is Most Correct