Financial distress can lead to financial and operating "games." Which of the following statements is (are)true?

Question

Quizplus · Accepted Answer

Financial distress can lead to financial and operating "games" where the firm may prioritize the interests of its stockholders or bondholders over the other. A firm's stockholders may prefer riskier projects because they have a higher potential return, but this can be detrimental to the bondholders who have a fixed rate of return and may prefer low-risk projects to ensure the firm's ability to pay back their debt. Additionally, the firm may underinvest in projects if it is unable or unwilling to borrow additional funds or issue new stock, leading to potentially missed opportunities for growth. Therefore, both statements (a) and (b) are true.

Financial Distress Can Lead to Financial and Operating "Games