The following are the reasons for firms to undertake risk-reducing transactions is practice:
I. reduce the risk of financial distress
II. reduce the fluctuations in its income
III. mitigate agency costs

Question

Quizplus · Accepted Answer

Firms undertake risk-reducing transactions to reduce the risk of financial distress which can arise due to unexpected events such as economic downturns or natural disasters. They also aim to reduce the fluctuations in its income which can affect their ability to pay their debts and meet their obligations. Additionally, risk-reducing transactions can help mitigate agency costs which arise due to conflicts of interest between shareholders and managers. Hence, options I, II and III are all valid reasons for firms to undertake risk-reducing transactions.

The Following Are the Reasons for Firms to Undertake Risk-Reducing