When shareholders pursue selfish strategies such as taking large risks or paying excessive dividends,these will result in:
A)undertaking scale enhancing projects.
B)investments of the same risk class that the firm is in.
C)positive agency costs, as bondholders impose various restrictions and covenants, which will diminish firm value.
D)no action by debtholders since these are equity holder concerns.
E)lower agency costs, as shareholders have more control over the firm's assets.

Question

Quizplus · Accepted Answer

Pursuing selfish strategies such as taking large risks or paying excessive dividends can harm the firm's financial health and reduce its value. In turn, this increases the risk of default for bondholders and lenders, leading them to impose various restrictions and covenants to protect themselves. These agency costs diminish the firm's value and benefits the equity holders at the expense of the debtholders. Therefore, the best answer is C - positive agency costs, as this reflects the adverse impact of shareholder's selfish behavior on the interests of other stakeholders.

When Shareholders Pursue Selfish Strategies Such as Taking Large Risks