A firm bankrupt from excess use of debt, which receives government bailout funds and government loan guarantees is incentivized to issue more high risk debt.

Question

Quizplus · Accepted Answer

If a firm knows it can rely on government bailout funds and loan guarantees, it may feel more secure in taking on additional high risk debt. This can create a moral hazard problem, as the firm may not have the same incentives to be careful with its use of debt if it feels it has a safety net in the form of government support.

A Firm Bankrupt from Excess Use of Debt, Which Receives