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

Question

Quizplus · Accepted Answer

When firms are in financial distress, their bondholders may have priority claims on the firm's assets, which means that if the firm commits new equity to positive NPV projects, the benefits may be shared with the bondholders rather than fully accruing to the equity holders. As a result, the firm may pass up positive NPV projects rather than committing new equity, as they may not see the full benefit of these projects.

Firms Facing Financial Distress May Pass Up Positive NPV Projects