Examples of behaviours that create agency costs of debt include situations where the borrowing entity:

Question

Quizplus · Accepted Answer

Investing in high-risk projects increases the likelihood of default, which in turn creates agency costs of debt as investors may demand a higher return to compensate for the higher risk. The other options are not necessarily indicators of agency costs of debt. Going through a broker to raise debt funds may actually improve transparency and reduce information asymmetry, paying minimal dividends may be a strategy to conserve cash and provide additional collateral for creditors, and putting the borrowed money in the bank may be a prudent liquidity management strategy.

Examples of Behaviours That Create Agency Costs of Debt Include