Creditors and shareholders may have an incentive incompatibility because:
A) shareholders can declare bankruptcy and hence have limited liability.
B) creditors must bear less risk than shareholders.
C) creditors can call debt if better opportunities arise.
D) shareholders choose projects with less risk than creditors would like.
E) none of the above; creditors and shareholders are both interested in maximizing the profits of the enterprise.

Question

Quizplus · Accepted Answer

Shareholders have limited liability, meaning they can declare bankruptcy and not be personally liable beyond their investment, which can lead to riskier decisions that may not align with creditors' interests.

Creditors and Shareholders May Have an Incentive Incompatibility Because