Rising bankruptcy costs should cause most firms to use less debt and more equity.

Question

Quizplus · Accepted Answer

When bankruptcy costs rise, it becomes more expensive for firms to file for bankruptcy and potentially restructure or liquidate their assets. This incentivizes firms to use less debt in their financing mix and opt for more equity financing, as equity does not require repayment and eliminates the risk of default and bankruptcy. Therefore, rising bankruptcy costs would cause most firms to use less debt and more equity.

Rising Bankruptcy Costs Should Cause Most Firms to Use Less