Issuing debt instead of new equity in a closely held firm more likely:
A) causes the owners-managers to work less hard and shirk their duties as they have less capital at risk.
B) causes the owner-managers to consume more perquisites because the cost is passed to the debtholders.
C) causes both more shirking and perquisite consumption since the government provides a tax shield on debt.
D) cause agency costs to fall as owner-managers do not need to worry about other shareholders.
E) cause the owner-manager to reduce shirking and perquisite consumption as the excess cashflow must be used to meet debt payments.

Question

Quizplus · Accepted Answer

Issuing debt instead of equity can motivate owner-managers to be more diligent and reduce unnecessary spending (perquisite consumption) because the firm must generate enough cash flow to cover debt payments, aligning their interests more closely with the firm's financial health.

Issuing Debt Instead of New Equity in a Closely Held