Leverage has unclear impact on corporate value as debt can reduce one aspect of agency costs (wasteful spending),but it may increase another (underinvestment).

Question

Quizplus · Accepted Answer

Leverage has both advantages and disadvantages that can potentially impact corporate value. On the one hand, debt can create discipline for managers by reducing wasteful spending and ensuring that they prioritize projects with high returns. On the other hand, it can also lead to underinvestment if managers are incentivized to avoid risk and focus on short-term gains rather than long-term growth. Ultimately, the impact of leverage on corporate value will depend on various factors, including the industry, the company's financial position, and the nature of its operations.

Leverage Has Unclear Impact on Corporate Value as Debt Can