The equity holders of a firm in financial distress have an incentive:
A)to accept risky projects that have some upside potential
B)to forego maintenance
C)a and b
D)neither a nor b as these actions will reduce the overall value of the firm.

Question

Quizplus · Accepted Answer

In financial distress, equity holders have an incentive to accept risky projects that have some upside potential as they require more risk to generate higher returns for equity holders. This approach can increase the likelihood of bankruptcy. Additionally, they may forego maintenance to conserve cash flow and maximize their recovery in the event of liquidation. However, both of these actions will reduce the overall value of the firm. Hence, choice C is the correct option.

The Equity Holders of a Firm in Financial Distress Have