The conflict of interest between creditors and shareholders when a company is in financial distress is an example of agency issues.

Question

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This conflict arises because the interests of creditors (who want to ensure the repayment of their loans) and shareholders (who may prefer riskier strategies for higher returns) diverge, especially when a company faces financial difficulties, exemplifying agency problems where agents (managers) may not act in the best interest of all principals (creditors and shareholders).

The Conflict of Interest Between Creditors and Shareholders When a Company