This is a situation that arises when a firm's equity is close to worthless, and equityholders will prefer to invest in overly risky projects with a small chance of success rather than simply paying debtholders their regularly scheduled payments.

Question

Quizplus · Accepted Answer

The overinvestment problem occurs when equityholders, whose equity is nearly worthless, prefer to take on high-risk projects in hopes of a large payoff, rather than making safe investments that primarily benefit debtholders.

This Is a Situation That Arises When a Firm's Equity