Firms facing financial distress may pass up positive NPV projects rather than commit new equity because:

Question

Quizplus · Accepted Answer

Firms facing financial distress may have a significant amount of debt outstanding, and if they take on new positive NPV projects with new equity, the benefits may be shared with the bondholders through the dilution of their shares. This can worsen the firm's financial situation, leading them to pass up on such projects in favor of other financing alternatives.

Firms Facing Financial Distress May Pass Up Positive NPV Projects