A potential agency conflict can arise between stockholders and creditors because owners may _____.
A) increase the risk of a firm's investments
B) decrease the amount of debt outstanding
C) decrease the risk of a firm's investments
D) increase the firm's net worth

Question

Quizplus · Accepted Answer

Stockholders may increase the risk of a firm's investments, which can lead to higher potential rewards for stockholders but may also increase the risk of default on debt payments and hurt creditors. This can create a conflict between the interests of stockholders and those of creditors.

A Potential Agency Conflict Can Arise Between Stockholders and Creditors