Equity holders have an incentive to ________ the volatility of a firm's assets because they benefit from such an increase at a cost to ________.
A)decrease, suppliers
B)decrease, debt holders
C)increase, debt holders
D)increase, directors

Question

Quizplus · Accepted Answer

Equity holders benefit from an increase in the volatility of a firm's assets as it can lead to higher potential returns for them. However, this increase in volatility can also lead to higher risk which affects the value of the firm, which will negatively impact debt holders as they have a fixed rate of return regardless of the company's performance. Thus, equity holders have an incentive to increase the volatility of the firm's assets at a cost to debt holders.

Equity Holders Have an Incentive to ________ the Volatility of a Firm's