Lenders interested in ensuring a large cushion of cash to mitigate the risks of the loan may include restrictions in the contract to preclude the company from paying out dividends to common shareholders. Shareholders may have to vote in a block to oust a Board who has undertaken these loans. What is this situation is consistent with?

Question

Quizplus · Accepted Answer

The situation described is consistent with Agency Theory, which focuses on the relationships between principals (shareholders) and agents (management) and the various conflicts of interest that may arise. In this case, the lenders are taking steps to mitigate the risk of the loan by restricting the company's ability to pay dividends, which may be seen as a potential signaling or agency problem. Shareholder activism may also be relevant, but it is not the best answer as it does not fully capture the dynamics at play.

Lenders Interested in Ensuring a Large Cushion of Cash to Mitigate