When shareholders pursue selfish strategies such as taking large risks or paying excessive dividends, these will result in:
I. no action by debtholders since these are equity holder concerns
II. positive agency costs, as bondholders impose various restrictions and covenants, which will diminish firm value
III. investments of the same risk class that the firm is in
A) I only
B) II only
C) III only
D) I and III only

Question

Quizplus · Accepted Answer

Option I is incorrect, as bondholders have a vested interest in the strategies pursued by shareholders, particularly when their investments are at risk. Option III is also incorrect, as it does not relate to the actions of shareholders. Option II is correct, as selfish actions by shareholders can result in agency costs that can lead to bondholders imposing restrictions and covenants to protect their investments, which can ultimately reduce firm value.

When Shareholders Pursue Selfish Strategies Such as Taking Large Risks