One of the indirect costs to bankruptcy is the incentive toward underinvestment. Following this strategy may result in:
I.the firm always choosing projects with positive NPVs;
II.stockholders turning down low-risk, low-return but positive NPV projects;
III.the firm declaring and paying high cash dividends

Question

Quizplus · Accepted Answer

Underinvestment can lead stockholders to reject low-risk, low-return projects even if they have positive NPVs (II), and firms may pay high dividends to transfer value to shareholders before potential bankruptcy (III).

One of the Indirect Costs to Bankruptcy Is the Incentive