The equity holders of a firm in financial distress have an incentive:
A) to accept poor risky projects that have some upside potential
B) to forego maintenance
C) a and b
D) neither a nor b as these actions will reduce the overall value of the firm.

Question

Quizplus · Accepted Answer

When a firm is in financial distress, the equity holders are incentivized to take risky projects that have some potential for a higher return, even if they have a higher risk of failure. Additionally, they may decide to forgo maintenance to save costs and maximize profits. However, these actions may reduce the overall value of the firm in the long run, as risky projects may fail, and neglecting maintenance may lead to significant repair costs down the line. So, both options, a and b, are often taken by equity holders in a distressed firm to maximize their returns, but these actions may not be the best for the overall value of the company.

The Equity Holders of a Firm in Financial Distress Have